CHEUNG YUK KWAN v. ROCCO DESIGN LTD

HCA 1368/2005

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1368 OF 2005

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REASONS  FOR  JUDGMENT

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1.  The Defendant is appealing against the order of the Master dated 19 September 2007 in:

(1) allowing the Plaintiff’s summons dated 7 December 2006 for specific discovery under O.24, r.7, RHC;

(2) refusing the Defendant’s summons dated 14 December 2006 for trial of preliminary issues;

(3) refusing the Defendant’s summons dated 17 September 2007 for amendment of the Defence.

2.  At the hearing, I dismissed the appeal.  I now give my reasons.

Background

3.  The Defendant is an incorporated practice of architects and engineers.  The Plaintiff was was appointed a director in 1995.  He resigned in 2003.

4.  The Statement of Claim alleged an oral agreement in 1994 to pay the Plaintiff a bonus equivalent to 5% of the annual profits on top of his emoluments.  In 1998, there was a waiver of the bonus by the Plaintiff in that he would not claim the bonus for the time being subject to a reservation of rights when the economy had picked up or the business ceasing or him becoming desperate.  The Plaintiff now seeks an account of profits with interest.

5.  The Defence denied any agreement of bonus and also pleaded limitation.  If, which is denied, that the bonus were payable, there should be a set-off of the discretionary bonus of HK$1,856,067 received by the Plaintiff, and the loans to Messrs. Hui, Lee and Yim, three principal directors of the Defendant, should be reckoned as payment of salaries and directors’ fees and be deducted from the profits.

6.  The documents sought on specific discovery are the management, audited and other financial accounts, tax returns and related documents of the Defendant from April 1994 to March 2003. 

7.  The proposed preliminary issues are framed as:

(1) whether the oral agreement alleged in para. 3 of the Statement of Claim (“the Alleged Oral Agreement”) had been validly concluded;

(2) if so,

(a)    whether any part of the Plaintiff’s claim under the Alleged Oral Agreement is time-barred;

(b)   whether the discretionary bonuses paid to the Plaintiff by the Defendant listed in the Schedule to the Defence are liable to be returned.”

8.  The amendment sought to delete para. 7 of the Defence which reads:

“7. Further or alternatively, the Defendant avers that:

(a) At all material times, none of Mr. Hui, Mr. Lee and Mr. Yim received any payments for their services rendered to the Defendant other than the sums recorded as loans to directors in the Defendant’s books.  The said sums were in substance payments of salaries and/or directors’ fees though they were not so recorded in the Defendant’s books.

(b) It was the common intention of the parties that any profits-linked bonus payable to the Plaintiff would be based on profits after deduction of all payments in the nature of salaries and/or directors’ fees irrespective of how they are recorded in the Defendant’s books.

(c) In the premises, if, which is denied, there was any agreement to pay the Plaintiff a profits-linked bonus, it was an implied term of the agreement that the sums paid to Mr. Hui, Mr. Lee and Mr. Yim referred to above should be deducted from the Defendant’s profits for the purpose of computing the amounts of the annual bonuses due to the Plaintiff.”

Applicable principles

9.  The guiding principles relating to discovery under O.24, r.7, RHC are set out in the Hong Kong Civil Procedure 2008 Vol. 1 para. 24/7/1:

“… (1) There is no jurisdiction to make an order under RSC, O24, r.7 for the production of documents unless (a) there is sufficient evidence that the documents exist which the other party has not disclosed; (b) the document or documents relate to matters in issue in the action; (c) there is sufficient evidence that the document is in the possession, custody or power of the other party.  (2) When it is established that those three prerequisites for jurisdiction do exist, the court has a discretion whether or not to order disclosure…”

10.  In Paul’s Model Art Gmbh & Co KG v UT Ltd & ors [2006] 1 HKC 238, Cheung JA said at p. 247H-248A:

“The real issue of relevance

25.    The real issue that has been focused at this hearing is whether the documents sought to be disclosed are relevant to the issues in this case between the plaintiff and the 4^th defendant.  In this context the issue must be one identified in the pleadings : Sun Yuet Tai Ltd v British American Tobacco Co (HK) Ltd (CACV No. 95 of 1999).  On the other hand the fact that an issue is raised in the pleadings is not determinative as to whether it relates to a matter.  Discovery is not required of documents which relate to irrelevant allegations in pleadings which even if substantiated could not affect the result of the action : Allington Investments Corp & Others v First Pacific Bancshares Holdings Ltd & Another [1995] 2 HKC 139.”

11.  The Hong Kong Civil Procedure 2008 Vol. 1 further stated at para. 24/8/1:

“… Even if the documents requested are relevant, the discovery must be refused if it is not necessary either for disposing fairly of the cause or matter or for saving costs.”

12.  Discovery solely for the purpose of impeaching the credit of the opposite party and does not relate to a matter in question should be refused as a matter of discretion (see Hong Kong Civil Procedure 2008 Vol. 1 para. 24/8/2).

13.  An order for the separate trial of separate issues is a departure from the general rule that all disputes should be tried together, and therefore generally speaking, such an order should only be made in exceptional circumstances or on special grounds (see Hong Kong Civil Procedure 2008 Vol. 1 para. 33/4/9A citing Lee Yiu Kwan v Ting Yin Wah & anor [2004] HKEC 1222).

14.  Whilst the normal procedure should still be that liability should be tried together, the court should be ready to order separate trials of the issues of liability and damages whenever it is just and convenient to do so (Hong Kong Civil Procedure 2008 Vol. 1 para. 33/4/11 citing Coenen v Payne [1974] 1 WLR 984, 988B-H per Lord Denning MR, 990A-B per Stamp LJ).

15.  In Wincheer Investments Ltd & anor v Lobley Co Ltd & anor HCA 8145/1992 (23 February 1995), Findley J referred to Coenen v Payne and said in para. 6:

“I prefer the approach of Lord Denning and Lord Justice Stamp.  I take it, as the guiding principle that I should not order the issues to be tried separately unless it is just and convenient to do so; by “just”, I mean fair to both sides, without one side or the other gaining an undue advantage by a separation, and by “convenient”, I mean convenient to both sides and advantageous from the point of view of costs.”

Plaintiff’s grounds

16.  Mr Swaine, for the Plaintiff, submitted that quantum is a pleaded issue in the Defence, and is relevant unless either the amendment or trial of preliminary issue or split trial is ordered.

17.  Mr. Swaine submitted that the normal rule of one trial on both liability and quantum should apply.  The same or overlapping witnesses are to be called on both issues and the consideration of credibility should not be split.  He referred to Wincheer v Winful ob. cit. where Findley J said in para. 16:

“… I can understand that one may well wish to avoid having witnesses give evidence twice and possibly, having their credibility assessed by different judges.  This factor militates against it being just and convenient to try the issues separately in this case.”

18.  Mr. Swaine submitted that para. 7 of the Defence is not just on quantum as para. 7(b) pleaded the common intention of the parties on the definition of profits in any profits-linked bonus scheme.  Moreover, the amendment of the Defence is only to jettison the pleas of set-off for the time being, to be revived if quantum were to be tried.  It amounted to an unmeritorious use of the rules on amendment, and was designed to achieve the ulterior motive to keep the Plaintiff and the Court in the dark.

19.  The alleged agreement sounded orally, and credibility of the parties is of vital importance.  Admittedly, the accounts contained a falsehood: salaries and directors fees were dressed up as loans to directors.  The accounts would be relevant in the Peruvian Guano sense in advancing the party’s own case or damaging the adversary or fairly leading to a train of enquiry which may have either or the consequences (see Hong Kong Civil Procedure 2008 Vol. 1 para. 34/2/10).

20.  The contention that the Plaintiff’s case is weak is rejected as assertion of the oral agreement in correspondence by the Plaintiff was met by deafening silence from the defendant.  Where liability would depend on credibility of the witnesses, any practice of false accounting would seriously affect the case the Defendant.  In any event, that is a matter for the trial judge.

Defendant’s grounds

21.  Mr. Man, for the Defendant, conceded that the same or similar witnesses are likely to be called on both liability and quantum, but convenience is but one of the considerations.  The witnesses are going to give evidence on different events, and they may be believed on some, and disbelieved on others.

22.  Mr. Man submitted that the Plaintiff’s only prayer is for an account.  Conceptually, an account is a remedy to be ordered after trial.  When ordered, the accounting party will make out his account on affidavit, and the other party will file a notice of objections, and it can be seen what issues require determination by the Court.  There may also be discovery. 

23.  The issue at the trial will be whether the Plaintiff is entitled to an account, and only when ordered will the issues on the profits be relevant, and only then will the Court be called upon to adjudicate upon the disputes. 

24.  Para. 7 of the Defence is not relevant to the determination of the issue of whether the alleged oral agreement existed.  Hence, the Defendant should be allowed to withdraw the pleadings for the purpose of the trial on whether an account should be ordered, without prejudice to reliance thereon upon the taking of the account.

25.  Mr. Man submitted that the separate trial of a preliminary issue which is decided in one way (i.e. in favour of the Defendant) is likely to be decisive of the litigation.  He referred to matters of merits in order to persuade the Court to view the issue of liability in favour of the Defendant:

(1) The termination documents signed by the Plaintiff clearly stated he had received all amount entitled in full discharge of all his claim to the Defendant;

(2) Apart from the e-mail in July 2003, 3 months after he left the employment, there was no prior document referring to the alleged oral agreement;

(3) The terms of the Plaintiff’s employment have always been recorded in writing;

(4) Employment documents relating to another former employee referred to a profit sharing scheme which would be separately arranged (but with no concluded agreement).

26.  Further, the Defendant who faced a prayer of an account should know exactly what case to meet, and not be bothered with irrelevant consideration of the manner of taking of the account.

Discussion

27.  The general position is that a trial should be on both liability and quantum, and discovery should be made on all relevant pleaded matters.

28.  Prima facie, the accounting documents are not relevant to liability save as to credit.  But in a trial on liability and quantum, there is no reason why documents disclosed on quantum could not be used in cross-examination on credit generally.  The real issue is whether there is convenience and savings on costs by ordering a separate trial or trial on preliminary issue.

29.  In the present case, both the issues of liability and quantum involve factual disputes with evidence from same or overlapping witnesses.  There is also cross-over on the issue of the definition of profits under the alleged oral agreement.  The consideration of credibility in totality is both just and convenient.

30.  The consideration might perhaps be different if a preliminary view on liability could more readily be presumed in favour of the Defendant.  The documentary evidence might throw light on the matter, but not to the extent that the Court could come to a view of the matter summarily.  It still remain a question for the trial judge.

31.  The parties are not embarrassed as to what the issues are as they now stand as pleaded.

32.  In the premises, I do not consider the separate trial of liability and quantum is convenient in saving costs or just in the fair disposal of the cause.

33.  I have also allowed an amendment of the Statement of Claim to add a claim for damages of the lost value of the bonus.  It is done on the basis that this appeal is to be determined without taking the amendment into account.

Costs

34.  I ordered that costs of the appeal be to the Plaintiff, to be taxed if not agreed.

35.  Lastly, I thank counsel for their submissions.