GOLDBAY FORTIS LTD v. RICH RESOURCE DEVELOPMENT LTD

HCA 2449/2013

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 2449 OF 2013

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D E C I S I O N

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Introduction

1.  This is the plaintiff’s appeal against the Order of Master Chow dated 7 February 2017 (“Master Chow’s Order”) made in respect of a summons for specific discovery issued by the plaintiff dated 14 June 2016 (the “Summons”).

2.  Master Chow granted the plaintiff’s application but added a limitation to each of the 2 classes of documents sought to be disclosed under Schedule 1 of the Summons.  The plaintiff appeals against the imposition of those limitations.

3.  The defendant also cross-appeals and seeks the entire refusal of the plaintiff’s application for specific discovery.

Relevant background

4.  The plaintiff is a subsidiary of CCT Fortis Holdings Limited, a listed company.  The defendant is a subsidiary of Chun Wo Development Holdings Limited (“Chun Wo”), another listed company.

5.  On 12 September 2013, the plaintiff (as purchaser) and the defendant (as vendor) entered into a Chinese Written Agreement (the “Agreement”).  The sale and purchase referred to in the Agreement related to 2 items: –

(1) the “Commercial Development” at No 8 Clear Water Bay; and

(2) 49% interest in the “Car park Development” at the same address

(collectively, “the Properties”).

6.  It is the plaintiff’s pleaded case in the Statement of Claim that the Agreement gave rise to express and implied contractual duties on the defendant during the currency of the Agreement, in particular: –

(1) the defendant shall exercise best endeavours in good faith to negotiate with the plaintiff on the terms of a formal sale and purchase agreement;

(2) the defendant shall not negotiate with others with a view to depriving the plaintiff of its pre-emptive right to buy the Properties; and

(3) the defendant shall not act in bad faith with a view to depriving the plaintiff of the said pre-emptive right.

7.  The defendant denies that there were such contractual duties.  In particular, the defendant avers at paragraph 9(c) of its Defence and Counterclaim that it was entitled to negotiate with a third party provided that: –

(1) it would not disclose the proposed transaction between the plaintiff and the defendant to the third party; and

(2) it would not make any agreement with the third party prior to termination of the proposed transaction between the plaintiff and the defendant.

8.  It is the plaintiff’s case that: –

(1) On 18 September 2013 (6 days after entering into the Agreement) the defendant already indicated that a potential purchaser made a higher offer and asked whether the plaintiff could make a higher offer.  The plaintiff responded by asserting its contractual rights under the Agreement.

(2) Then between 4 October 2013 and 21 October 2013 there were negotiations between solicitors of the parties on the terms of the formal sale and purchase agreement.

(3) On 25 October 2013, there was a without prejudice meeting between the plaintiff and the defendant at the end of which the plaintiff made 2 proposals and the defendant agreed to consider them.

(4) On 1 November 2013, the plaintiff chased the defendant for a reply.

(5) Unbeknown to the plaintiff, the defendant had in fact: –

(i) signed a “Receipt of Earnest Money” dated 27 September 2013 stating that the defendant had received from another party (“High Peace”) a sum of HK$13,800,000.  This was earnest money for High Peace’s offer to purchase the Commercial Development only at a price of HK$353,800,000.  The cashier order was made payable to the defendant’s solicitors and dated 16 September 2013; and

(ii) signed a written memorandum with High Peace for the sale and purchase of the Commercial Development (the “HPCL Memorandum”). The HPCL Memorandum was dated 4 November 2013.

(6) At 5:35 pm on 4 November 2013, the defendant’s solicitors delivered a letter to the plaintiff’s solicitors.  The defendant asserted that the plaintiff and the defendant could not reach an agreement on the terms of the formal sale and purchase agreement.  The defendant therefore purportedly terminated the Agreement.

(7) The plaintiff’s case is that up to that time, parties were still negotiating.  The plaintiff asks the court to infer and find that the defendant had breached its contractual duties in that: –

(i) prior to 5:35 pm on 4 November 2013, the defendant had been engaged in negotiation with High Peace with a view to depriving the plaintiff of its pre-emptive right;

(ii) the defendant had acted in bad faith in the purported termination of the Agreement.  Its intention was to sell the Commercial Development at a higher price; and

(iii) the defendant did not exercise best endeavours in good faith in the process of negotiating the formal sale and purchase terms with the plaintiff.

(8) Furthermore, the plaintiff avers that the defendant must have breached confidentiality and divulged information to High Peace because the HPCL Memorandum expressly refers to its knowledge of “pending and threatened claims or litigation involving the Commercial Development”.

9.  It is the defendant’s case that: –

(1) the defendant executed the HPCL Memorandum at around 6:00 pm on 4 November 2013 after the defendant had validly terminated the Agreement;

(2) the defendant was entitled to enter into negotiation with High Peace prior to termination of the Agreement on 4 November 2013; and

(3) the defendant denied having breached the Agreement by acting in bad faith or by failing to exercise best endeavours in good faith.

10.  In a nutshell, a crucial issue on the pleadings to be determined at trial is whether the purported inability to agree on the terms of a formal sale and purchase agreement was staged by the defendant in bad faith as a pretext for terminating the Agreement so that it could sell the Commercial Development at a higher price to High Peace after the plaintiff had refused to make a higher offer.

The specific discovery sought

11.  Schedule 1 of the Summons asked for specific discovery of 2 classes of documents: –

(1) all documents, correspondence, emails exchanged between High Peace…(on one hand) and Chun Wo and the defendant…(on the other hand) leading to the execution of the Receipt of Earnest Money…; and

(2) all documents, correspondence, emails exchanged between High Peace ... [ditto] leading to the execution of and concerning the HPCL Memorandum.

12.  The defendant accepts that the above 2 classes of document exist and are in their possession.  The defendant, however, argues that “they are neither relevant nor necessary for the fair disposal of these proceedings”.

13.  Master Chow was apparently of the view that the documents sought are only relevant to a limited extent: ie, whether there was breach of confidence on the part of the defendant in divulging information about the proposed transaction between the plaintiff and the defendant to High Peace.  Master Chow accordingly imposed a similar limitation to both classes of documents in her discovery orders: “…limited to documents relating to the disclosure of the terms of the [Agreement] signed by the Plaintiff and the Defendant”.

14.  The plaintiff appeals against such limitations. The plaintiff argues that these documents are relevant generally for all the issues identified in paragraphs 6 to 10 hereinabove.  Relevance is not confined to the specific “breach of confidence” allegation.

15.  The defendant cross-appeals and argues that the 2 classes of documents are not relevant to any issue at all.

Applicable law

16.  At the hearing of this appeal, the following principles as summarised in Practice Note 24/7/1 of the Hong Kong Civil Procedure 2017 are not in dispute: –

(1) The relevance of the documents is to be determined by the pleadings.  And they have to be looked at broadly.

(2) The Peruvian Guano test remains the test of relevance.  A document is relevant if: (i) it is reasonable to suppose that it contains information which may, not must, either directly or indirectly enable the party requiring the same either to advance his own case or to damage the case of his adversary; or (ii) it is a document which may fairly lead the party to a train of inquiry which may have either of those two consequences.

(3) If the party seeking discovery establishes a prima facie case, it is for the party objecting to the order for discovery to satisfy the court that the discovery is not necessary either for disposing fairly of the cause or matter or for “saving costs”.

Discussion

17.  I agree with the plaintiff that on a macro-level, the documents sought are relevant because: –

(1) The Agreement was signed on 12 September 2013.

(2) On 16 September 2013, High Peace caused to be issued a cashier order of HK$13,800,000 in favour of the defendant’s solicitors.  Arguably, there were already negotiations between the defendant and High Peace between 12 September 2013 and 16 September 2013.

(3) Two days later, on 18 September 2013, the defendant admittedly told the plaintiff that another potential purchaser had offered to pay a higher price for the Commercial Development.  The defendant even attempted to squeeze the plaintiff into putting up its offer.  This is again consistent with the existence of negotiations between the defendant and High Peace. 

(4) On 27 September 2013, the defendant entered into the “Receipt of Earnest Money” with High Peace.  It was on the same day that the plaintiff’s solicitors complained of the defendant’s failure to provide a draft formal sale and purchase agreement.

(5) It was after the defendant’s securing of a higher offer from High Peace that the defendant purportedly negotiated with the plaintiff on the terms of a formal sale and purchase agreement.

(6) After the 25 October 2013 “WP meeting”, the defendant did not aver “inability to agree”.  Instead, the plaintiff had to chase the defendant for a reply.

(7) On 4 November 2013, two important events took place: (i) signing of the HPCL Memorandum; and (ii) the defendant’s purported termination of the Agreement.  The terms of the HPCL Memorandum harped back to the offer price and earnest money appearing on the earlier “Receipt of Earnest Money”.

(8) It is upon the above broad chronology of events that the court shall at trial have to assess the “good faith”/ “bad faith” / “best endeavours” of the defendant in its attempt to come to terms with the plaintiff on a formal sale and purchase agreement.

(9) The conduct of the defendant between 12 September 2013 and 4 November 2013 will justifiably be placed under close scrutiny to see whether: –

(i) the defendant had been negotiating with High Peace (soon after 12 September 2013) in bad faith with a view to depriving the plaintiff of its pre-emptive right; and

(ii) the defendant had acted in “bad faith pretext” to deprive the plaintiff of its pre-emptive right as opposed to acting in good faith with best endeavours during its negotiations with the plaintiff for the terms of a formal sale and purchase agreement.

(10) In the circumstances, I agree that the timing and contents of all communications between High Peace and the defendant pertaining to the proposed sale of the Commercial Development to High Peace no doubt may shed light and reflect directly or indirectly on the “good/bad faith” of the defendant, in particular, whether it had the intention of depriving the plaintiff of its pre-emptive right.

18.  At the hearing of the appeal, the defendant submitted that the plaintiff’s arguments of implied terms of good faith “does not even get off the ground”.

19.  In this regard, I agree with the plaintiff that a discovery application is not the venue to argue the strength or weakness of a party’s case.

20.  The plaintiff’s case based on “implied terms” remains a part of its pleaded case.  “Relevance” remains to be judged by the pleaded issues in place between the parties.

21.  Furthermore, I agree with the plaintiff that the documents sought are also relevant at a micro-level: –

(1) The defendant pleaded that the termination letter was sent at 5:35 pm on 4 November 2013 and the HPCL Memorandum was only executed at 6:00 pm that day.  In the Reply, the plaintiff put the defendant to strict proof of this allegation.

(2) Yet, from the documents so far disclosed by the defendant, the assertion of “6:00 pm execution” is not backed by any contemporaneous document.

(3) It is important to note that the defendant accepted that it would be a breach of the Agreement if it executed the HPCL Memorandum prior to termination of the Agreement.

(4) In the premises, the exact timing of the execution of the HPCL Memorandum is highly relevant to whether the defendant was in breach.

(5) The communications between High Peace and the defendant pertaining to the proposed sale of the Commercial Development to High Peace no doubt may shed light and reflect directly or indirectly on the exact timing of the execution of HPCL Memorandum.

(6) Further, the defendant has pleaded at paragraph 9(c) of its Defence and Counterclaim that it was entitled under the Agreement to negotiate with High Peace provided that it did not enter into binding agreement prior to termination of the Agreement.  The defendant denied having breached the Agreement.  The combined effect of the defendant’s pleas is that the defendant did not enter into any binding agreement with High Peace prior to 5:35 pm on 4 November 2013.  This was put in issue by paragraph 20 of the Reply.

(7) In the circumstances, I agree that the two classes of documents sought by the plaintiff are clearly relevant to the issue of whether and when the defendant and High Peace entered into any binding agreement.  In other words, the documents sought may damage the case of the defendant as pleaded.

22.  By reason of the foregoing, I agree that the plaintiff has established “the Peruvian Guano relevance” at both macro and micro levels based on the pleaded issues between the parties.

23.  I further agree that the words of “limitation” in Master Chow’s Order were based, with respect, on her erroneous assessment of “relevance”.  I accept that the relevance of these documents does not simply lie in the fact that they may reveal the divulging of information about the Agreement to High Peace.  Accordingly, it is wrong to impose such limitations to both classes of the documents.

Conclusion and Disposition

24.  The plaintiff has established a prima facie case for specific discovery order and the burden is on the defendant to satisfy the court that discovery is not necessary either for disposing fairly of the cause or for saving costs.

25.  The defendant has failed to suggest any reason.  The disclosure sought is effectively confined to documents/correspondence/ emails exchanged between High Peace and/or its agents (on one hand) and Chun Wo and the defendant and/or their agents (on the other hand) within a fairly narrow time-frame: between 12 September 2013 and 4 November 2013.  The defendant has not suggested that it would involve an unduly laborious exercise or great expenses.  In fact, the defendant has not suggested any form of difficulties in complying with the order of disclosure.

26.  In the circumstances, the plaintiff’s appeal is allowed and the defendant’s cross-appeal is dismissed.  I make the following order: –

(1) Master Chow’s Order be varied by removing the words “limited to documents relating to the disclosure of the terms of the Memorandum signed by the Plaintiff and the Defendant” in paragraph 1 of Schedule 1 to the said Order;

(2) Master Chow’s Order be varied by removing the words “limited to documents relating to the disclosure of the terms of the Memorandum signed by the Plaintiff and the Defendant” in paragraph 2 of Schedule 1 to the said Order;

(3) The time of “28 days” in paragraphs 1, 2, 3 and 4 of Master Chow’s Order be varied to “14 days”;

(4) Paragraphs 5 and 6 of Master Chow’s Order be set aside; and

(5) The defendant do pay to the plaintiff the costs of the Summons (with certificate for counsel) and the costs of this appeal, such costs are to be taxed if not agreed.

27.  The above order as to costs is nisi and shall become absolute in the absence of any application within 14 days to vary the same.