CHAN CHUN LUNG ALLEN AND ANOTHER v. RYLAND LTD. AND OTHERS

HCA 4904/96

HEADNOTE

Unless order - approach in Hong Kong - contumelious non-compliance - absence of extraneous factors excusing non-compliance - O.20 r.8 - "amendment" of sealed Order - power to discharge orders obviously made without jurisdiction

HCA 4904/96

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CIVIL ACTION NO. 4904 OF 1996

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J U D G M E N T

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1. On 28 May 1999, Master Barnes made an unless order requiring the 5th Defendant to supply particulars of his Amended Defence and Counterclaim by 4:00 pm on 4 June 1999. Such particulars were not provided and, pursuant to a summons taken out some 6 weeks after expiry of the time limit that had been imposed by Master Barnes' Order, the 5th Defendant now applies for a seven day extension of time for complying.

The Action

2. The Action giving rise to the present application is brought by the Plaintiffs, who are brother and sister, against nine Defendants, including their father, who is the 5th Defendant. These parties are the protagonists in the application now before me. The other eight Defendants consist in the first place of four companies holding relevant assets and involved in relevant trusts and, secondly, of four minors who are the respective children of the Plaintiffs and so the grandchildren of the 5th Defendant.

3. The family has been unfortunate enough to have already gone through a round of bitter litigation concerning a highly successful company known as Playmates Investments Limited, in which various family members owned substantial interests. That litigation (Companies Winding-up Proceedings No 270 of 1994), which also principally involved the 5th Defendant and other members of his family, was eventually settled in December 1996.

4. In the present Action, the Plaintiffs allege that certain assets, in particular their shares in Playmates Investments Limited, held through various companies, were held and intended to be held for the benefit of specified members of the family in a "designated ratio". Thus, it is alleged that the 1st and 2nd Plaintiffs were intended to have and are entitled to a 20% and 5% beneficial interest respectively in the assets in question.

5. The Plaintiffs go on to allege that they were persuaded by a tax adviser to participate in a scheme which involved the injection of such assets into certain discretionary trusts, but that the scheme was a sham involving illegal tax evasion and aimed at concealing their interests in the assets in question. The Plaintiffs plead that they resiled from such scheme before it was acted upon and now seek declarations that the assets are held for their benefit on resulting trust.

6. In his pleadings, the 5th Defendant seeks to uphold the validity of the arrangements made. He denies that there was any common intention for the assets to be held in any such "designated ratio". To the extent that the arrangements need to be unscrambled, he contends that they were made at his sole discretion and that the assets remain at his ultimate disposal, an oral agreement having been reached with his sons concerning how the assets were to be treated. The 5th Defendant alleges that the discretionary trusts were set up as essentially protective measures because the 1st Defendant had acted imprudently and mishandled his own financial affairs. The allegations of tax evasion and illegality are therefore denied. The 5th Defendant counterclaims for declarations concerning his rights as beneficial owner of specified assets.

The request for particulars

7. The relevant requests for particulars consist of a request dated 13 March 1999 and a supplemental request dated 17 March 1999. Some of the particulars sought are clearly of central importance to the issues in the Action.

8. For example, the 5th Defendant alleges that:-

"It was the common intention and understanding of all the family members that the shareholdings so given to them ....... remained at the ultimate disposal of the 5th Defendant, and that they would accordingly comply with his future wishes as to the transfer or reallocation of such shares, and with any terms and conditions he might from time to time impose in relation to the shares."

9. It is therefore not surprising that the first request was for particulars of this alleged "common intention and understanding".

10. To take another example, the 5th Defendant alleged in relation to the 1st Plaintiff that:-

"....... [he] sold the PHL shares which were distributed to him and invested the proceeds ....... His investments were so imprudent that within about two years he had lost or dissipated virtually the whole thereof."

11. This naturally attracted requests for particulars of the alleged sale, the re-investment of the proceeds, the imprudence and the dissipation.

12. As allegations of this nature were central to the 5th Defendant's case, one would have expected particulars to be readily forthcoming. However, this was not the case.

13. In response to the request, on 27 March 1999, Messrs F Zimmern & Co ("FZ"), solicitors then acting for the 5th Defendant, wrote to Messrs Herbert Smith ("HS"), solicitors for the Plaintiffs, saying that the solicitor in charge was away from Hong Kong until 8 April 1999. They obtained agreement for an extension until 14 April 1999 for the supply of the particulars.

14. The month passed and on 19 April 1999, HS wrote asking for the particulars, pointing out that the agreed extension had expired. FZ replied on 21 April, saying that they were finalizing the answers with their client and would be providing them "early next week". The particulars were therefore being promised for the week commencing Monday 26 April.

15. The particulars did not appear. On 4 May 1999, HS wrote again, demanding the particulars by 6 May and threatening to seek an appropriate order if this was not done. When the particulars still did not materialise, the Plaintiffs took out a summons dated 8 May 1999 seeking an order for the particulars to be delivered within 14 days.

16. This led to an Order made by consent on 12 May, extending the time limit for providing the particulars to 26 May 1999. This was therefore the second time that service of the particulars was promised, over two months after the request was first made.

17. On 25 May1999, HS wrote reminding FZ that the particulars were due on the following day.

18. However, on 26 May 1999, the last day for providing the particulars pursuant to the consent order, FZ wrote stating that their client and his assistants were "currently out of town and would not be able to approve the Answers to your request until they return to Hong Kong on 7 June 1999." Simultaneously, the 5th Defendant took out a summons asking for a further 21 days to serve the particulars.

19. Dissatisfied that the 5th Defendant's summons was made returnable only on 3 June, the Plaintiffs took out their own summons on 27 May 1999, made returnable on 28 May, asking for an unless order giving the 5th Defendant 7 days to provide the particulars. On the same day, HS wrote to FZ stating: "We consider it necessary to record our serious concern over the way you and your client deal with our clients' requests for the particulars of your client's Amended Defence and Counterclaim." The letter records steps taken by the 5th Defendant said to be motivated by a desire to procrastinate.

20. Pursuant to the Plaintiffs' summons, Master Barnes duly made an unless order on 28 May 1999. It was in the following terms:-

"....... unless by 4:00 pm on Friday, 4th June 1999, the 5th Defendant supply particulars of his Amended Defence and Counterclaim in response to the Plaintiffs' Request for Further and Better Particulars dated 13th March 1999 and Supplemental Request for Further and Better Particulars dated 17th March 1999, his Amended Defence and Counterclaim be struck out, judgment in terms as sought in the Amended Statement of Claim be entered for the Plaintiffs against the 5th Defendant and the 5th Defendant's Counterclaim be dismissed with costs on both the main claim and on the 5th Defendant's Counterclaim."

21. On 3 June 1999, the day before time for compliance with the unless order was to expire, HS wrote to FZ reminding them of the deadline and reiterating the Plaintiffs' concern that the 5th Defendant was engaging in deliberate delaying tactics.

The 5th Defendant's reaction to the unless order

22. It is not in dispute that the 5th Defendant was perfectly well aware that an unless order had been made and that the consequence of non-compliance would be his exclusion from defending the Action and, as the Order then stood, dismissal of his counterclaim and judgment for the Plaintiffs against him. Nonetheless (and again this is not in dispute), on or shortly prior to 4 June 1999, the deadline for compliance, the 5th Defendant instructed FZ not to take any further steps in the proceedings (and hence to allow the time limited by the unless order to expire).

23. The explanation which the 5th Defendant gives for his decision to take this course is that he was hopeful of an imminent settlement of the Action.

24. He says that before the end of May 1999, his son Thomas had told him that the 5th Defendant's estranged wife (and the mother of Thomas as well as of the Plaintiffs) had informed Thomas that she believed she could convince the Plaintiffs to settle. He states that before 4 June, Thomas told him that his estranged wife had confirmed that the Plaintiffs had agreed to settle the disputes along the lines of an earlier proposal.

25. Purely on the basis of information so received, without himself or his solicitors having been approached with any proposal or for any negotiations, the 5th Defendant states that he persuaded himself "that it was ended as far as [he] was concerned and that the other parties could sort out the details amongst themselves."

26. The decision of the 5th Defendant to turn his back on the unless order and the proceedings was soon conveyed to all the other parties. It must also have been clear to the 5th Defendant that the other parties had starting taking steps to progress the Action on the footing that he had dropped out.

27. Thus, on 10 June 1999, 6 days after the deadline, HS wrote to solicitors representing all the other parties, including FZ, pointing out that the 5th Defendant had not provided the Further and Better Particulars and had not sought any further extension of time. The other parties were therefore asked to proceed with exchanging witness statements.

28. Then on 15 June 1999, FZ wrote to HS stating: "We understand that our client has reached a settlement with the Plaintiffs. In the circumstances, we shall be pleased if you can send us your draft of the Deed of Settlement for our review."

29. On the next day, HS replied as follows: "Both we and our clients are surprised at the allegation that settlement has been reached between our respective clients. As should be clear to you from the conduct of the proceedings recently, no settlement has been reached. This is consistent with our understanding as we have been having virtually daily contact with our clients during the last 6 weeks."

30. It would therefore have been entirely clear to the 5th Defendant by 16 June 1999 that his hoped-for settlement had not come to fruition. Notwithstanding this, he states that he instructed FZ "to notify all parties that I would take no further part in this action."

31. Mr Roger Beresford, who represented the 5th Defendant at the hearing, indicated that this notification is to be found in a letter dated 24 June 1999 from FZ to HS copied to the 5th Defendant as well as to the solicitors for the other parties. That letter states:-

"In the light of the events set out in the second paragraph of your letter [dated 10 June], it must be clear to all parties concerned that our client would not wish to take any further part in respect of these proceedings."

The reference to the "second paragraph" is a reference to HS's letter noting that the 5th Defendant had not supplied the particulars and had not sought an extension of time, as I have mentioned.

32. According to the 5th Defendant, it was only on 28 June 1999 that he was told by Thomas that he had been informed by his mother that "the settlement agreement was now off the table" because the Plaintiffs had been advised that the action could not be settled amongst the family members alone.

33. The 5th Defendant and Mr. Beresford have been at pains to explain that, having gone through the first round of bitter and hurtful litigation with other members of his family, the 5th Defendant had become "a reluctant participant in these proceedings" and was "now more tired of them than ever." Indeed, the 5th Defendant states that he was "at [his] wits end to find a resolution to these legal proceedings that would allow these bitter waters of family contention to subside." It therefore appears likely that he found the proceedings so thoroughly stressful and distasteful that he simply decided not to face them any longer, but to allow himself to be excluded from the defence. He no doubt took comfort from the hope or belief that a settlement could be reached, notwithstanding the extremely tenuous basis for any such notion.

34. It may also be noted that, as Mr Beresford submitted at the hearing, the 5th Defendant does not regard himself as potentially to be benefited if the Plaintiffs claim should be defeated. His primary case is that the arrangements are valid and that the discretionary trusts should be upheld for the benefit of his grandchildren. Those grandchildren are of course the 6th to 9th Defendants in these proceedings, appearing with the benefit of a guardian ad litem. It may therefore be the case that the 5th Defendant viewed himself as an inessential party and considered that even if he were precluded from defending the Action as a result of non-compliance with the unless order, the Plaintiffs would still face resistance from some of the other Defendants who could, if necessary, fight the case as proxies for the 5th Defendant.

35. Mr Paul Shieh, who appeared for the Plaintiffs, sought to argue that the 5th Defendant's evidence should be treated as incredible. He argued that there were numerous gaps in his explanation of why he had acted as he did and that, subjected to a rational analysis, the story did not stand scrutiny. How, for instance, could one possibly accept that the 5th Defendant proceeded on the basis of a settlement being imminent when all he had to go on was the multiple hearsay of what Thomas had told him his estranged wife had said concerning the likely attitude of the Plaintiffs? How could the 5th Defendant say that he continued to believe that a settlement was still being negotiated up to 28 June when faced with correspondence denying the existence of any settlement and with steps being taken by the Plaintiffs' solicitors to progress the case towards trial in relation to the other parties?

36. In my judgment, while such points are legitimate matters of comment, they do not justify my rejecting the 5th Defendant's evidence as incredible. He may have been grasping at straws and his conduct may be described as unrealistic or even to an extent irrational. However, I am prepared to accept that he reached his decision not to comply with the unless order for the sorts of reasons I have described above.

37. The fundamental question is whether, given his conduct as described above, and applying the legal principles that have developed in this area, I should now exercise my discretion in favour of granting the 5th Defendant an extension of time to comply with the unless order.

The legal principles

38. In PT Bank Pembangunan Indonesia (Persero) v Tan Eddy Tansil [1997] HKLRD 57 (a case decided on 14 November 1995), the Court of Appeal was faced with deciding whether to extend time to permit compliance with an unless order for disclosure in aid of a Mareva injunction. Bokhary JA, as he then was, laid down the test as follows (at p 59):-

"The test to be applied here is, in my judgment, the one laid down by Sir Nicolas Browne-Wilkinson VC giving the leading judgment in the case of In re Jokai Tea Holdings Ltd [1992] 1 WLR 1196 when he said this at p. 1203 B:

'In my judgment, in cases in which the court has to decide what are the consequences of a failure to comply with an "unless" order, the relevant question is whether such failure is intentional and contumelious. The court should not be astute to find excuses for such failure since obedience to orders of the court is the foundation on which its authority is founded. But if a party can clearly demonstrate that there was no intention to ignore or flout the order and that the failure to obey was due to extraneous circumstances, such failure to obey is not to be treated as contumelious and therefore does not disentitle the litigant to rights which he would otherwise have enjoyed.'"

39. Applying that principle, the Court of Appeal held that where non-compliance with the unless order is due to the default of the solicitor rather than the litigant himself such default should be regarded as an extraneous cause of non-compliance so far as the litigant is concerned, inclining the court towards granting him an extension of time.

40. This decision has since been regarded by Courts at first instance in Hong Kong as representing a binding precedent on the principles to be applied (although not without the expression of some reservations): Chow Kai Sang v Toi Samuel [1996] 4 HKC 330; Ming Pao Enterprise Corp Ltd v CIM Co. Ltd. [1999] 1 HKC 497; and Dongguan Dongxian Decoration Co. Ltd. v Universal Right Ltd [1999] 1 HKC 790.

41. That the PT Bank Pembangunan case represents the law appears also to have been the view of the Court of Appeal in Lessy SARL v Pacific Star Development Ltd [1997] HKLRD 1248. While Godfrey JA in that decision referred to the guidance given by the English Court of Appeal in Hytec Information Systems Ltd v Coventry City Council [1997] 1 WLR 1666, and recommended that practitioners bear it in mind, his Lordship expressly pointed out that no such guidance has yet been given by the Court of Appeal here.

42. In so far as they may be relevant, the reservations which have been expressed in relation to the Jokai approach concern the non-attribution of a solicitor's default to the litigant in question. That is however an issue that does not arise in the present case since it is clear that the non-compliance here resulted entirely from the 5th Defendant's instructions and not through any default on the part of his solicitor.

43. I pause also to note that a trend is detectable in some of the English authorities to lower the threshold for refusing extensions of time where unless orders have been disobeyed. Thus, in the Hytec case, Auld LJ (at p. 1677) stated (with the agreement of Lord Woolf MR) as follows:-

"In my judgment, there is no need to confine the test to that of an intentional disregard of a court's peremptory order, whether or not it is characterised as flouting, contumelious, contumacious, perverse, obstinate or otherwise. Such an intent may be the most usual circumstance giving rise to the exercise of this jurisdiction. But failure to comply with one or a number of orders through negligence, incompetence or sheer indolence could equally qualify for its exercise. It all depends on the individual circumstances and the existence and degree of fault found by the court after hearing representations to the contrary by the party whose pleading it is sought to strike out."

44. In the light of the Hong Kong authorities I have cited, I do not consider such an approach as yet to represent the law in this jurisdiction. The test I propose to adopt is that set out in the PT Bank Pembangunan case, taken from the Jokai case.

45. The question is therefore whether the 5th Defendant's failure to comply was "intentional and contumelious" or whether, on the contrary, he has been able "clearly [to] demonstrate that there was no intention to ignore or flout the order and that the failure to obey was due to extraneous circumstances", keeping in mind that the court should not be astute to find excuses for such non-compliance.

46. The PT Bank Pembangunan test makes it clear, that, as with any other case in which a party approaches the Court for an indulgence, it is incumbent on the Applicant to adduce evidence upon which an exercise of discretion in his favour may be founded. As has often been pointed out, the dual requirements of (i) the lack of contumelious conduct and (ii) the existence of extraneous circumstances excusing non-compliance, overlap. Thus, in Hytec (at p. 1677), Auld LJ stated:-

"There is inevitably some scope for overlap between these two separate notions for an applicant seeking to avoid a strike out. In showing that his failure was due to extraneous circumstances, he would in ordinary circumstances demonstrate that it was not intentional."

47. For non-compliance to be contumelious, there is no necessity for it to involve anything akin to a contempt of court. Non-compliance is contumelious where it is the result of the litigant's conscious and deliberate decision to ignore or disobey the court's order in the absence of any extraneous excuse. Such deliberate conduct may be contrasted, for instance, with cases where the litigant has made a serious effort to comply in good faith but has been unsuccessful through bad luck or incompetence (c.f., Ka Wah Bank Ltd v Lo Chung-song & Anr [1989] 1 HKLR 451), or with cases where the litigant has not complied because of circumstances outside his control (including cases where his solicitor has negligently or otherwise missed the deadline through no fault of the litigant).

The principles applied

48. In my judgment, the 5th Defendant's non-compliance was contumelious in the sense discussed. He has failed to demonstrate that his failure to comply was due to any extraneous circumstances capable of supporting an exercise of discretion in his favour. On the contrary, it is clear that he knew full well that he was subject to the unless order and realised the consequences of disobedience, but, for reasons of his own, decided to instruct FZ not to take any further steps in the Action, thereby deliberately ignoring the Order. His reasons for so doing provide no excuse. It does not help his cause to say that he disobeyed the Order hoping that a settlement was imminent or that he did so simply because he found the litigation so distasteful that he decided not to take any further part in it. Such reasons merely throw light on the thought processes which may have led him to the decision not to comply. They do not constitute extraneous circumstances which in some way prevented due compliance.

49. Mr Beresford points out that prior to the making of the unless order, the particulars had only been the subject of a single order of the Court. I accept that this is the case and that the present case is not one of the worst that can be found in the law reports. However, the Court is entitled to take into account the entire history of the litigation and not merely the orders made by the Court: Lee Shuk Yee v Lee Suk Ping & Others, Civ App 1996 No. 132 (12 December 1996). As I have already stated, the particulars sought bear on central aspects of the 5th Defendant's case and were obviously required for any proper pleading. The 5th Defendant should either have had such particulars readily to hand or abstained from making the allegations in the first place. There was no excuse for failing to provide the particulars by 4 June 1999, when the deadline expired, since the request was first made on 13 and 17 March. Indeed, the evidence tends to suggest that ultimately there was no real difficulty providing the particulars, but that the 5th Defendant had simply decided to withhold them for the reasons already given.

The Plaintiff's "amendment" of the unless order

50. Mr Beresford points to the way in which the unless order was purportedly amended by the Plaintiffs and urges that this indicates that the whole exercise amounts to a tactical manoeuvre by the Plaintiffs, so that the Court should exercise its discretion in the 5th Defendant's favour. The point arises in the following way.

51. I have already set out the wording of the original unless order obtained on 28 May. It will be recalled that it provides for three consequences adverse to the 5th Defendant in the event of non-compliance, namely: (i) that his Amended Defence and Counterclaim would be struck out; (ii) that judgment in the terms sought in the Amended Statement of Claim would be entered for the Plaintiffs against the 5th Defendant and (iii) that the 5th Defendant's Counterclaim would be dismissed with costs. That Order was sealed on 16 June 1999.

52. The Plaintiffs then realised that since the only relief sought against the 5th Defendant was by way of declaratory judgments, they had offended against a well-established rule of practice (if not strictly of law) by seeking such a declaratory judgment in default of compliance with the court's order: Supreme Court Practice 1999, 15/16/2 at p 268. Accordingly, they tried to get registered an Order which deleted the award of judgment but retained the striking out and dismissal of the Amended Defence and Counterclaim.

53. The Master's clerk contacted the Plaintiff's solicitors and stated that the Master wanted them to appear to consider the terms of the Order. The Plaintiffs' solicitors therefore decided to issue an ex parte Summons dated 17 June 1999 purportedly under O. 20 r.8, and, pursuant thereto, persuaded Master Barnes on 22 June 1999 to Order that the abovementioned Order be amended so as to change its date from 27 to 28 May and to delete the words "judgment in terms as sought in the Amended Statement of Claim be entered for the Plaintiffs against the 5th Defendant". In other words, the Plaintiffs confined the consequences of non-compliance with the unless order to consequences (i) and (iii) mentioned above, disavowing any declaratory judgment against the 5th Defendant by default.

54. On the same occasion, the Plaintiffs obtained an Order from Master Barnes reflecting the 5th Defendant's non-compliance with the "amended" Order and recording that the 5th Defendant's Amended Defence had been struck out and his Counterclaim dismissed.

55. Plainly, the Plaintiffs were right to be concerned as to their purported entitlement to a declaratory judgment by default. However, the steps taken to disavow that judgment were procedurally misconceived. The Order had been sealed and was in any event, not susceptible to "amendment" under O. 20 r. 8 (as sought by the ex parte summons) since that rule expressly excludes judgments and orders from its ambit. It was also misconceived to seek to effect such an amendment ex parte.

56. In any event, Mr Beresford very fairly made it clear (since I had indicated that I did not consider the original order fatally flawed) that he was not seeking to appeal against the original unless order. However, he wished to contend nonetheless that the Plaintiff's misguided treatment of the unless order was indicative of abuse and the seeking of mere tactical advantage.

57. I am unable to accept that argument. While procedurally misconceived, the conduct of the Plaintiffs or their solicitors does not indicate any attempt at abuse or gaining mere tactical advantage. On the contrary, they were seeking to take out of the Order a consequence which they rightly perceived themselves not entitled to. The Order was perfectly valid in relation to the other two consequences of non-compliance prescribed by the learned Master.

58. While maintaining the abovementioned argument, Mr Beresford indicated that he would not object to the Court on its own motion intervening to discharge orders obviously made without jurisdiction with a view to restoring procedural order, as done by the Court in Munk v Munk (1985) Fam Law 131. This is a course which Mr Shieh invited me to adopt.

Conclusion

59. I have therefore come to the conclusion that no grounds have been made out for relieving the 5th Defendant's of his own deliberate decision not to comply with the unless order. I therefore dismiss his application for an extension of time for compliance.

60. As it appears to me that the Order of Master Barnes dated 22 June 1999 purporting to vary the Order of 28 May 1999 by amendment was obviously made without jurisdiction, I order that it be discharged.

61. It follows that the Order of Master Barnes also dated 22 June 1999 reflecting non-compliance with the Order as purportedly amended must also be discharged and I so Order.

62. Finally, I Order that that part of the Order of Master Barnes dated 28 May 1999 consisting of the words "judgment in terms as sought in the Amended Statement of Claim be entered for the Plaintiffs against the 5th Defendant" be discharged on the ground that no basis existed for the grant of a declaratory judgment by default in the present case.

63. I will hear the parties as to costs.