SUN FOCUS INVESTMENT LTD v. TANG SHING BOR AND ANOTHER

HCA 538/2007

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 538 OF 2007

____________

BETWEEN

____________

_____________

D E C I S I O N

_____________

Introduction

1.  This is the plaintiff’s application for leave to file and serve a fresh statement of claim.  This application became necessary following the striking out of the amended statement of claim earlier on 5 October 2009.

2.  This action was commenced in March 2007.  It is common ground the parties were interested in jointly developing a piece of real property in Shanghai for sale.  According to the amended statement of claim, the plaintiff contributed about $3.6 million into the project (equivalent to 15% of the joint venture business).  But apart from about $1.6 million, the defendants failed to pay other sums to the plaintiff.

3.  The plaintiff’s claim, which amounted to about RMB16.8 million, was originally based on the following principal causes of action:-

(a)    a partnership agreement;

(b)    misrepresentation.

4.  However, during the hearing of the striking out application, the plaintiff clarified that its principal cause of action should in fact be:-

“... a contract, in personam, [between the plaintiff and the defendants] to the effect that, upon injection of monies by the plaintiff, [the defendants] would, in their personal capacity, pay to the plaintiff its return based on the percentage share of the plaintiff in the whole project worked out by reference to the amount of money the plaintiff has paid” (para. 10, judgment dated 5 October 2009).

The references to a partnership agreement and misrepresentation were therefore linguistic mistakes.

5.  The defendants oppose this application, contending that the re-formulated claim has no prospect of success.  The contention is premised on:-

(1)    the Limitation Ordinance (Cap. 347);

(2)    the claim is nothing more than the reflective loss of the joint venture company;

(3)    the “personal” contract averment is inconsistent with the contemporaneous documents.

Time Limitation

6.  The fresh statement of claim avers, among other things, an oral agreement which was made in July 1993.  Two breaches have been pleaded:-

(a)   over-charging the joint venture company for management fees in favour of a company controlled by the defendants;

(b)    abandoning a loan which was advanced to a company controlled by the defendants.

The amount claimed is now about RMB3 million (instead of the former RMB16.8 million or so).

7.  The defendants argue that the claim is not raised until after the 6-year period for making it has already expired and is therefore time-barred; according to the fresh statement of claim, the over-charging took place before February 2003, alternatively, December 2003, and the loan was abandoned in February 2004.

8.  S. 35(1)(b), Cap. 347 provides however:-

“For the purposes of this Ordinance, any new claim made in the course of any action shall be deemed to be a separate action and to have been commenced ... in the case of any other new claim, on the same date as the original action” (emphasis supplied).

S. 35(2)(a), Cap. 347 defines “new claim” to mean:-

“... any claim by way of set-off or counterclaim, and any claim involving either ... the addition or substitution of a new cause of action”.

9.  The defence submits that, by reason of the operation of s. 35(1)(b), Cap. 347, it will be prejudiced if the new claim can be made “out of time”.  It also contends that, before the plaintiff is permitted to make a new claim, the court should require the plaintiff to show that the defence will have no reasonably arguable defence of limitation to the new claim, or that the plaintiff can bring the new claim within ss. 35(5) and (6), Cap. 347 and RHC Ord. 20 r. 5(5).

10.  In short, those statutory provisions require the new cause of action to arise:-

“... out of the same facts or substantially the same facts as a cause of action in respect of which relief has already been claimed in the action by the party applying for leave to make the amendment”: s. 35(6)(a), Cap. 347.

11.  The material averments when pleading a cause of action in breach of contract are: the particulars pertaining to the making of the contract, the relevant contract terms, the breach(es) and the loss caused by the breach(es): see, for example, Hong Kong Civil Procedure 2010, Vol. 1, para. 18/7/7, 18/12/3 and 18/12/10.

12.  In this application, the defence argues that at least:-

(1)    the oral agreement;

(2)    the two breaches summarised in para. 6 above,

have not been pleaded in the struck out amended statement of claim.  Thus, at least insofar as those matters are concerned, the plaintiff cannot bring itself within s. 35(5) or (6), Cap. 347 or Ord. 20 r. 5(5).

13.  In relation to the oral agreement, the struck out amended statement of claim already referred to an agreement made in 1993 (albeit called therein a “partnership agreement” at the time).  The gist of the terms set out in the amended statement of claim is similar to those set out in the draft fresh statement of claim.  It is therefore wrong to think that the agreement is only raised now.  The plaintiff may be able to establish at trial that this aspect falls within s. 35(5) or (6), Cap. 347 or Ord. 20 r. 5(5).

14.  In relation to the breaches of agreement, the plaintiff relies on s. 26(1)(b), Cap. 347:-

“...where in the case of any action for which a period of limitation is prescribed by this Ordinance, ... any fact relevant to the plaintiff's right of action has been deliberately concealed from him by the defendant ... the period of limitation shall not begin to run until the plaintiff has discovered the ... concealment ... or could with reasonable diligence have discovered it”.

15.  In this connection, the plaintiff avers that there has been deliberate concealment; the over-charging and the loan abandonment only came to its knowledge in about June 2004: para. 30 to 31, draft fresh statement of claim.

16.  In short, I agree with the plaintiff. Accordingly, I conclude that the claims made in the fresh statement of claim may be found at trial to fall within ss. 26(1)(b), Cap. 347.

Reflective Loss

17.  During the striking out application, the defence put forth the argument (among others) that the claim fell within the rule against claiming reflective loss.  This is summarised in Anthony Eric Ryan Hotung v. Ho Yuen Ki and Others [2010] 2 HKLRD 304 as follows:-

“In company law, the rule against recovery of reflective loss debars a shareholder from suing to recover a loss which is merely a reflection of the loss suffered by the company of which he is a shareholder: Johnson v. Gore Wood & Co (No 1) [2002] 2 AC 1; Landune International Ltd v. Cheung Chung Leung [2006] 1 HKLRD 39” (para. 16).

The argument was rejected by the court in the judgment dated 5 October 2009 (see para. 33 thereof).

18.  As the parties correctly accept, the propriety of the over-charging and the loan abandonment has not been challenged by the plaintiff in the context of the affairs of the joint venture company.  Because of the lack of such a challenge, it cannot be said that the joint venture company has suffered loss as a consequence.

19.  However, that the plaintiff has not raised such challenge does not mean it cannot raise a complaint against the defendants in their personal capacity.  For example, the plaintiff may complain that the defendants have breached the duty of conflict of interest and/or the “self-dealing” rule in their capacity as agents: Bowstead and Reynolds on Agency (2006) 18^th Ed., para. 6-063 to 6-074.

20.  By virtue of the matters set out in para. 18 and 19 above, I agree with the plaintiff it is highly arguable the loss pleaded in the draft fresh statement of claim is not reflective loss.

Oral Agreement Inconsistent with Contemporaneous Documents

21.  This argument has again been raised during the striking out application.  The defence refers to various documents which tend to show that the plaintiff was fully aware that the joint venture was undertaken through a corporate vehicle, and knew of its participation in the joint venture as a shareholder thereof.

22.  On the other hand, while it is common for businesses to be carried on by way of a corporate vehicle (at least as-between the corporation and third parties), this does not necessarily preclude the joint venture “partners” from establishing that, among themselves, the corporate business is in truth a partnership.  Winding-up petitions based on ss. 168A and/or 177(1)(f), Companies Ordinance (Cap. 32) are well-known examples of such instances.

23.  I therefore agree with the judgment dated 5 October 2009 that the contemporaneous documents are not such as should “drive the plaintiff from the judgment seat” (see para. 34 thereof).

Conclusion

24.  Consequently, leave is given to the plaintiff to file and serve the draft fresh statement of claim.

25.  If necessary, I shall hear the parties regarding the time for filing and serving amended pleadings.  Unless they do so within 3 days, the defence shall be at liberty to file and serve an amended defence within 21 days and the plaintiff shall be at liberty to file and serve an amended reply within 14 days thereafter.

Costs Order

26.  The parties agree the following costs orders. In relation to the costs incurred and thrown away by the fresh statement of claim (for the avoidance of doubt, these should include the costs of all the wasted pleadings) and the costs of any consequent amendment, these should be paid by the plaintiff.  In relation to the costs of the hearing on 2 September 2010, these should follow the event.  In other words, these costs should be paid by the defendants to the plaintiff.

27.  I consider summary assessment of the above costs to be appropriate.  For this purpose:-

(a)    the plaintiff be at liberty to lodge with court and serve a statement of costs in relation to the costs of the said hearing within 7 days;

(b)    the defence be at liberty to lodge with court and serve a statement of objections within 7 days thereafter;

(c)   similar to sub-para. (a) above, the defence be at liberty to lodge with court and serve a statement of costs in relation to the costs of the wasted pleadings and the consequent amendment within 7 days of the filing of the amended defence;

(d)    the plaintiff be at liberty to lodge with court and serve a statement of objection within 7 days thereafter.