AI ZHONG AND ANOTHER v. METROFOND LTD

   HCA2627/2008

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

   ACTION NO. 2627 OF 2008

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BETWEEN

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J U D G M E N T

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Facts

1.  The plaintiffs entered into a formal sale & purchase agreement with the defendant for the purchase of a penthouse of the property called “the Legend”. The consideration was HK$88,880,001. The plaintiffs duly paid the deposit of HK$8,880,001 (about 10% of the purchase price) to the defendant.

2.  The plaintiffs alleged that the defendant had misrepresented in the transaction and refused to complete. The plaintiffs sued for the recovery of the deposit and for damages of $4,200,000. The defendant counterclaimed for breach of contract and sought damages of $29,472,664.6.

3.  The defendant applied for the plaintiffs to provide security for costs in this action under Order 23, rule 1. The application was refused by Master De Souza and the defendant appealed.

Discussion

4.  I will deal first with the issue of “ordinary residence”, then secondly,I will determine who is the real attacker in this proceeding. Finally, I will consider the merits of the case of both sides.

5.  Order 23, rule 1 provides that :

“Security for costs of action, etc.

(1)  Where, on the application of a defendant to an action or other proceeding in the Court of First Instance, it appears to the Court-

(a)  that the plaintiff is ordinarily resident out of the jurisdiction, or...

….

then if, having regard to all the circumstances of the case, the Court thinks it just to do so, it may order the plaintiff to give such security for the defendant's costs of the action or other proceeding as it thinks just.”

Ordinary residence out of jurisdiction

6.  Counsel for the plaintiffs, Mr Adrian Leung readily admitted that both plaintiffs are ordinarily residents of Mainland China. But he further submitted that both plaintiffs have adopted Hong Kong as a place of ordinarily residence voluntarily and for a settled purpose.

7.  On a plain reading of the relevant rule, the plaintiffs’ admission of ordinarily residence of Mainland China should be sufficient for the application of the rule. Mr Edward Chan SC, counsel for the defendant, submitted to the same effect but Mr Leung did not explain his reason for arguing that the plaintiffs are ordinarily residents of Hong Kong. He just went on to submit that a person could be ordinarily resident in two countries at the same time and that because the 1^st plaintiff has a Hong Kong Identity Card (“HKIC”), he is prima facie ordinarily resident in Hong Kong. He relied on Re : Wong Lei Kwan Joanne, ex p Bank of China (Hong Kong) Ltd [2009] 3 HKLRD 173 for the two propositions above.

8.  It should be noted that the 1^st plaintiff does not hold a permanent HKIC. His HKIC is subject to certain conditions and limitations. Right of abode is often the distinguishing feature and the underlying reason of a class of similar identity documents from the same country. The fact that the 1^st plaintiff cannot reside in Hong Kong as of right means that his status is a lot different from the applicant in Wong Lei Kwan, who held a permanent HKIC.

9.  It should also be noted that in Wong Lei Kwan, Barma J said :

“22.  Although I would accept that the fact that Ms Wong holds a Hong Kong identity card and has a residential address recorded at the Companies Registry provides prima facie evidence that she is resident, and perhaps ordinarily resident, here, as was held by Deputy Judge Louis Chan in Re Shum Fong Chung, ex p DBS Bank (Hong Kong) Ltd (unrep., HCB 5782/2006, [2007] HKEC 523), I am satisfied that the evidence which she has adduced, in the form of the Immigration Department records and her own affidavit, are more than sufficient to rebut such a prima facie case.”  [emphasis supplied]

10.  Since both plaintiffs were unable to provide a residential address in Hong Kong, Wong Lei Kwan is not applicable to them.

11.  In the end, I would hold that the plaintiffs were not ordinarily resident of Hong Kong.

12.  If I am wrong in this and one of the plaintiffs is ordinarily resident in Hong Kong, how does it affect the plaintiffs’ case? Strangely enough, Mr Leung did not submit on this issue. I think it can only assist the plaintiffs’ case if :

(1)  There is a rule that spares a plaintiff who is ordinarily resident of Hong Kong from paying security for costs, even though he is also ordinarily resident of another jurisdiction.

(2)  The plaintiff who is not ordinarily resident in Hong Kong is spared from paying security for costs because the co-plaintiff in the same course of action is an ordinarily resident within the jurisdiction.  (D’Hormusgee v Gray (1882) 10 QBD 13)

13.  I am unable to find any case that supports contention (1). I am satisfied that in light of the complexities of the law concerning “ordinarily residence”, if contention (1) was intended by our Legislature it would have been clearly provided in the text.

14.  The rule in D’Hormusgee was noted by Hong Kong Civil Procedure 2010, Vol. 1, p. 496 para. 23/3/5. The case concerned a foreign plaintiff and a local plaintiff. The court held that Order XVI, rule 1 did not “make any alteration in the practice as regards security for costs”. It is unclear what version of Order XVI their Lordships were referring to. I note from the Supreme Court of Judicature Act (1873) the possible relevant passage :

“ORDER XVI. PARTIES

1.  All persons may be joined as plaintiffs in whom the right to any relief claimed is alleged to exist, whether jointly, severally, or in the alternative.  And judgment may be given for such one or more of the plaintiffs as may be found to be entitled to relief, for such relief as he or they may be entitled to, shall be entitled to his costs occasioned by so joining any person or persons who shall not be found entitled to relief, unless the Court in disposing of the costs of the action shall otherwise direct.”

15.  Denman J in D’Hormusgee decided that the rule did not alter their practice as regards security for costs. Therefore the version of Order XVI which his Lordship was referring to does not matter. The most important issue in that case is what the practice regarding security for costs was at that time. Regrettably nothing in the judgment explains what the practice and the reason behind were, but it is implicit from the judgment of Denman J that at that time, a foreign plaintiff did not have to provide security for costs when there was a local co-plaintiff in the same action.

16.  This ancient rule is rarely invoked in Hong Kong courts. Hong Kong Civil Procedure 2010 referred it as a “well settled rule that orders for security for costs will not be made against a foreign plaintiff if there are one or more co-plaintiffs resident in the jurisdiction”. It is useful to note that the two Hong Kong cases cited in Hong Kong Civil Procedure 2010 under the heading “Foreign and Hong Kong co-plaintiffs (rr.1-3)” do not really touch upon the issue in D’Hormusgee. The two cases are Ng Yat Chi & Another v Max Share Ltd & Another [1996] 4 HKC 284 and Wison (Shanghai) Chemical Engineering Co. Ltd v Simmons & Simmons [2008] 2 HKLRD 72. D’Hormusgee was not cited and its reasoning was not discussed in any of these judgments. Whatever the position in England is, I have great reservations about the relevance of this rule in Hong Kong today.

17.  It is useful to note here that the rule in D’Hormusgee, if taken literally, would create a very absurd result. I will summarise the above passages into two propositions :

(1)  When a co-plaintiff is ordinarily resident in the jurisdiction, regardless of whether he is ordinarily resident out of the jurisdiction, he can exempt a foreign co-plaintiff from paying security for costs.  (D’Hormusgee)

(2)  When a plaintiff is an ordinarily resident out of the jurisdiction, then regardless of the fact that at the same time he is also an ordinarily resident in the jurisdiction, he needs to pay security for costs.

18.  It is apparent that either (1) or (2) has to be changed in order to avoid the absurd result that “ordinarily resident in the jurisdiction” can help a co-plaintiff but not the plaintiff himself. One way to fix this would be to qualify (1) with a further requirement that the plaintiff who is ordinarily resident in the jurisdiction must not be ordinarily resident out of the jurisdiction. This would reconcile the two propositions perfectly.

19.  An alternative approach is to change proposition (2) so that “ordinarily resident in the jurisdiction” will prevent Order 23, rule 1 from being applied. However, as I indicated above, I do not think that that was the intention of our Legislature.

20.  There is still another approach that could be taken. As Webster J said in Slazengers Ltd v Seaspeed Ferries Ltd; The Seaspeed Dora [1987] 2 All ER 905, the rule in D’Hormusgee is of a doubtful origin. Given the age of the rule (over 100 years) and the fact that it is rarely invoked, there is a chance that this “rule”, which was reduced by Slazengers into “not an unvarying rule”, may be subsumed by the general discretion of the court in granting applications of this kind. In short, the rule in D’Hormusgee may have become one of the many factors which the court should look at in coming to its conclusion.

21.  For reasons above, I hold that neither of the plaintiffs is ordinarily resident of Hong Kong and even if I am wrong in this, it does not support the plaintiffs’ case in this application.

Real attacker — General principles

22.  It has been said that when a defendant counterclaims, there is a chance that an application by the defendant for security of costs against the plaintiff would be refused. It is useful to set out the various rules concerning the importance of who is the “real attacker” in a proceeding before I consider the arguments from counsel of both sides :

(1)  The court has a discretion in all applications for security for costs, and it is not a question of merely considering whether the claim and counterclaim arise out of the same issue of fact but a question of “what is fair and just in all the circumstances”.  (Hutchison Telephone (U.K.) Limited v Ultimate Response Limited [1993] BCLC 307, per Dillon LJ)

(2)  Application for security for cost should be refused if it will prevent the plaintiff from pursuing its claim but in the course of defending the counterclaim all the same matters would be canvassed as would be canvassed if the plaintiff were to pursue its claim.  (Goal Setting Consulting Company Limited v Unigraphics Solutions Asia/Pacific Incorporated, HCA994/2003, citing BJ Crabtree (Insulation) Ltd v GPT Communication Systems Ltd, 59 BLR 43)

(3)  Application should also be refused when the cost incurred by the defendant for the purposes of the defence might equally and perhaps preferably be regarded as costs necessary to prosecute the counterclaim.  (Goal Setting, citing Crabtree)

(4)  The existence of a counterclaim out of the same matters as that in the plaintiff's claim per se does not affect the court's ability to order security for costs against the plaintiff.  (Winghing Investments Ltd v Lee Hoi Wing & Another, unreported, CACV378/2005)

(5)  It is pertinent to ask whether in the particular case the counterclaim is a cross-action or operates as a defence, that is to say merely operates as a defence.  (Hutchison, per Dillon LJ)

(6)  In determining the question in (5), the most important factor to consider is whether “the claim by the plaintiffs and the cross-claim by the defendants - raise essentially the same issues and are going to be fully litigated anyway so far as one can tell”.  (BJ Crabtree (Insulations) Ltd v GPT Communication Systems, per Bingham LJ at p.54)

(7)  In determining the question in (5), the marked discrepancy in size between the amount claimed in the action and the very much greater amount claimed by the cross claim is also a relevant factor.  (Hutchison, per Dillon LJ)

(8)  A defendant should not be required to give security for costs if he is only defending himself from the plaintiff's claim.  (Hutchison, per Bingham LJ)

(9)  When both the plaintiff and defendant can be viewed as attackers, the treatment of both parties in security for costs should be the same.  (Samuel J Cohl Co v Eastern Mediterranean Maritime Ltd (The Silver Fir) [1980] 1 Lloyd’s Rep. 371, cited with approval by Ma J in Brand Farrar Buxbaum LLP v Samuel-Rozenbaum Diamond Ltd and Others [2003] 1 HKLRD 600)

Real attacker - application to the current case

23.  Mr Chan for the defendant submitted that Crabtree does not apply because in that case if security was granted the plaintiff would suffer hardship in pursuing its case. He further submitted that the court is bound to follow Winghing, a Hong Kong Court of Appeal decision.

24.  It is true that the ratio of Crabtree was the hardship caused by the application but that does not mean that item (3) above can be ignored. It has been repeatedly accepted by the court in Hong Kong that an application of this type will be refused if the defendant is the real attacker. As a matter of logic, a “plaintiff” should not be prejudiced merely because he, being one of the parties in the same dispute, acted ahead of the other party. I am satisfied that items (6) and (7) had been met by the defendant. The defendant might not have a valid claim against the plaintiffs when the writ was served on it, because the resale did not occur. At that time, Mr Chan submitted that the defendant could only forfeit the deposit held by them and could not claim for damages because the re-sale did not occur. That might be the case then, but it is no longer the position of the defendant today. It is unimaginable that the defendant would give up its claim if the plaintiffs suddenly decide not to sue.

25.  In this respect it is also useful to consider the decision by Fung J in Wison (Shanghai) Chemical Engineering Co. Ltd v Simmons & Simmons [2008] 2 HKLRD 72 :

“38.  However, the claim and counterclaim are exact mirror images of each other.  In the circumstances, the reasoning in BJ Crabtree (Insulations) Ltd v GPT Communication Systems is apposite.  As according to Mr McCoy even where the claim were stayed upon non-payment of the security, the plaintiff could still defend the counterclaim with the resolution of all the same issues.  If so, an order for security would in effect be making the plaintiff pay security as the defendant to the counterclaim but without the effect of stay for non-payment.  It may be that if there were separate issues in the claim not covered in the counterclaim, security for costs might be imposed thereon.”

26.  This explains clearly the underlying reason behind item (2). In my view, the current proceeding centers on a single issue and that is whether the defendant had misrepresented in the property transaction. If misrepresentation can be established, then the plaintiffs can succeed on its claim (for recovery of deposit) and successfully defend from the counterclaim (for damages for breach of contract), and vice versa.

27.  I would deal with the submission concerning the Winghing case by Mr Chan very succinctly. The Court of Appeal affirmed, at para.24, the decision of Deputy Judge Muttrie in allowing the defendant’s application for security for costs in spite of the defendant’s counterclaim concerning essentially the same matter. The facts are indeed similar to the current case, as both involve property transaction and recovery of deposit after failure to complete. At first sight it would appear that this court is bound to follow Winghing but I think both counsel overlooked the judgment of Woo VP :

“22.  It appears that my fear is not without foundation.  In the skeleton submission of Mr Andrew C H Y Leung, counsel for the defendants before us, it has been mentioned no less than five times that the defendants will not proceed with their counterclaim if the plaintiff’s claim is dismissed.”  [emphasis supplied]

28.  Clearly from this passage, the defendants in Winghing are not attackers because they are willing to give up their counterclaim on the condition that the plaintiff’s claim is dismissed. Winghing is not a case where two parties races to the Court to sue each other on the same matter. It is a case where the defendant trails behind the plaintiff, observing the plaintiff, and responding to the plaintiff’s action. Item (6) is thus not satisfied.

29.  Mr Leung for the plaintiff cited paras 19 and 20 of Winghing and said that Winghing was decided on its peculiar facts. However, the only difference between Winghing and the current case, apart from what was said above, is that the defendant in Winghing sought to have the solicitor pay out the second deposit to them while the defendant here sought damages.

30.  I cannot see any material difference between a counterclaim for damages and that for second deposit. Woo VP in Winghing referred “the plaintiff's defence to counterclaim” as he overturned the decision of Deputy Judge Muttrie in allowing the second deposit to be paid upon default of security for costs by the plaintiff (for contravening item (8)). Clearly the second deposit was seen as a counterclaim, and probably as one arising out of the same matter. If the defendant in Winghing did not mention anything about giving up the counterclaim upon the dismissal of the claim, the defendant’s application for security of costs might well have been refused.

31.  For reasons above, I am satisfied that the defendant’s counterclaim arose out of essentially the same matter and that the defendant can properly be viewed as the attacker. According to The Silver Fir the treatment of both parties should be the same (Item (9)). Since the defendant cannot be ordered to give security for costs under Order 23, the only outcome is that neither party needs to pay security for costs.

Merits of the case

32.  In an appropriate case, the court is also required to consider the merits of the case of both parties. The approach can be found in Sunchase International Group (China) Ltd & Others v Vincor Group of Companies (Investment) Ltd & Others [2004] 1 HKLRD 731. Rogers VP said :

“5.  ...It is not the function of the court, when faced with an application for security for costs, to make a preliminary run at deciding the ultimate success or failure of the claim.  The Judge has approached this on the basis that the plaintiffs have a bona fide claim.  He has also approached it on the basis that the defendants have a bona fide defence.  Mr Wong today says that the Judge should have come to the additional conclusion that the plaintiffs had a substantial chance of success.  I do not see that that was the Judge's function in a case like this.  In a simple case that may be so, but here the defendants are contesting the plaintiffs’ claim and there is no way that the Judge could resolve that contest at this stage.”

33.  The defendant undoubtedly has a bona fide defence. Does the plaintiffs have a bona fide claim? I am mindful of the fact that there is very little evidence that points to misrepresentation. Also, as submitted by Mr Chan, the plaintiffs’ failure to complete occurred at the time when the property market was unstable. I am however aware of the fact that :

(1)  The plaintiffs did not use a company to hold such a valuable property, as most buyers do.

(2)  The plaintiffs are not ordinarily residents of Hong Kong, and they may not be familiar to the language and customs used in property transactions in Hong Kong.

For the two reasons above, I think there is a chance that the plaintiffs were really misled during the property transaction.

34.  The issue of whether the plaintiffs were really misled can only be determined by a proper trial. As noted by Rogers VP, I should not consider the chance of success of either party at this stage.

Conclusion

35.  Accordingly, I would dismiss the defendant’s appeal with costs to the plaintiffs, to be taxed if not agreed.