PAGODA VENTURES LTD v. JE FULFILMENT LTD AND ANOTHER

HCCL 39/2007

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMMERCIAL ACTION NO. 39 OF 2007

(transferred from High Court Action No. 1806 of 2007)

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J U D G M E N T

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The application

1. There is before the court, pursuant to a summons dated 21 April 2008, an application by the plaintiff for an order that there be a ‘split trial’ of the issues of liability and quantum in this action.

2. The application, which has been argued by leading counsel, was adjourned part-heard on 5 May 2008, the hearing being completed in the late afternoon of 6 June 2008.

3. The decision in this application is of some urgency, in light of forthcoming applications as to specific discovery and security for costs which are due to be heard in early July 2008.

This litigation

4. This is litigation of some size.  This case originally was intituled HCA 1806 of 2007, but was transferred into the Commercial Court by consent.  In order to place this application into context, I should perhaps say a few words about the background to this claim as now mounted in this court.

5. The plaintiff contends that in May 2007 a binding contract was concluded between itself and the 1^st defendant wherein the plaintiff agreed to sell and the 1^st defendant to buy a total of 360,000 metric tones of scrap metal consisting of used rails.  The rails were to be delivered in 12 monthly consignments, each consignment comprising 30,000 metric tonnes; the price of the rails was agreed at US$218 per metric tonne, thus making the total contract price US$78,480,000.

6. Under this contract the 1^st defendant was required to provide an unconditional Standby Letter of Credit (‘the standby credit’) to cover the value of 30,000 metric tonnes of used rails in the sum of US$6,540,000.

7. However, the 1^st defendant did not provide the credit, the plaintiff contending that such non-provision amounted to a repudiation of the contract, which repudiation was accepted by the plaintiff, which now sues for damages for breach of contract.

8. The damages alleged to have been suffered are substantial: a variety of figures are pleaded in the alternative at paragraph 21 et seq in the Re-Amended Statement of Claim, and range from the sum of US$31.39 million to US$105 million.

9. For its part the 1^st defendant contends that no binding contract was concluded between the parties, in particular relying upon Clause 2.1 of the contract, which provides that the contract is to become operative when the buyer and seller both have initialled and signed the contract and appendices, and maintaining that it neither had initialled or signed Appendix 1.

10. The 1^st defendant also relies upon various other contractual provisions, and further denies that the plaintiff is entitled to damages as alleged or at all, and in any event maintains that the plaintiff failed to mitigate its loss by failing to seek alternative buyers for the used rails.

11. The plaintiff alleges that the issue of whether there is a binding contract is to be decided according to the law of Texas – under which the contract is to be regarded as binding irrespective of whether the 1^st defendant initialled and signed Appendix 1 – and further replies that, by reason of the conduct of the 1^st defendant, the 1^st defendant is barred by waiver and/or is estopped from contending that the contract is not binding.

12. The foregoing, of course, represents no more than a very broad account of the nature of the dispute, albeit for present purposes there probably is no necessity to condescend to greater detail.

‘Split trial’: established principles

13. I apprehend that there is no difference between counsel as to the principles which have been laid down governing the court’s power to order what is colloquially referred to as a ‘split trial’, although there is a chasm dividing the parties in terms of its desirability in this case.

14. Order 33 rule 4(2), RHC, provides:

“In any …action different questions or issues may be ordered to be tried at different places or by different modes of trial and one or more questions or issues may be ordered to be tried before the others.”

The commentary in the 2008 edition of Hong Kong Civil Procedure – at MN 33/4/11, at page 603 – reflects the fact that “normal procedure” requires the trial of liability and damages together, although the editors note that the court should be ready to order separate trials of the issues of liability and damages where it is “just and convenient to do so”, and further emphasise that the order to separate trials of liability and damages “is only to be made in exceptional cases where there was a clear line of demarcation between the issues of liability and quantum”.

15. In a personal injuries action, Coenen v. Payne [1974] 1 WLR 984, at 988F-G, Lord Denning made reference to the “normal practice that liability and damages should be tried together”, but noted that the courts should be more ready to order separate trials “wherever it is just and convenient to do so”, whilst in the same case Stamp LJ observed that “it is a regular practice to determine liability and then have an inquiry as to damages.”

16. In Wincheer Investments Ltd v. Lobley Co. Ltd, unrep., HCA No A8145 of 1992, judgment dated 23 February 1995, Mr Justice Findlay embarked upon a review of the principles upon which a court may order that issues of liability and quantum be separately tried, and adopted the approach of Lord Denning and Stamp LJ in Coenen v. Payne, op cit.:

“I take it, therefore, 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…”

17. In Telford Development Ltd v. Shui On Construction Co Ltd [1990] HKC 110, in delivering the judgment of the Court of Appeal in an appeal against an order at first instance ordering the trial of four preliminary issues, Bokhary J (as he then was) observed as follows, at 117:

“The general rule is that all the issues in a case are to be tried at one and the same time.  There is power to order that different issues in a case be tried at different times.  But that departure from the general rule is ordered only if it is just and convenient.  And it is, of course, for the party who seeks such a departure to demonstrate that it is indeed just and convenient.

We do not think that circumstances as they existed when this matter was before Mayo J or as they stand now, demonstrate that the trial as preliminary issues of the issues which have been ordered to be so tried is just or convenient.  The estimates as to how long the trial of the action as a whole, on the one hand, and the trial of the preliminary issues ordered, on the other hand, would take are vague in the extreme.  So on any view, it is impossible to estimate with any degree of accuracy how much time and costs would be saved if the preliminary issues determined the Telford action.  And this is even ignoring the possibility that the result of the MTR action would render the whole of the Telford action unnecessary.  Then there are the other considerations…which point away from the idea that it is just and convenient to order the trial of the preliminary issues sought by Shui On.  Here, we have in mind among other things: (i) the need to proof and call witnesses (who, it might be added, might have to be proofed and called again when the main trial takes place); and (ii) the delay to the main trial which may be occasioned if the result of the trial of the preliminary issue is appealed to this court and possibly even beyond…”  

18. Finally, and more recently, the Court of Appeal in Mai Gou v. Mak Chik Lun [2001] 3 HKLRD 248 re-emphasised the general rule that all issues arising in an action should be tried together, and that an order for the separate trial of separate issues should only be made in exceptional circumstances or on special grounds, and that therefore the court should be “extremely cautious” before acceding to pleas for making such orders, Le Pichon JA in this case taking the opportunity to review in some detail the applicable principles underpinning any order for the trial of preliminary issues.

19. Whilst it is readily appreciated that there is a conceptual distinction between the order of a trial of a preliminary issue and the order for a ‘split trial’ of the issues of liability and damages – and that, if anything, the court should be even more careful before ordering a preliminary issue under Order 33, RHC – nevertheless it is clear that both concepts share the common theme that as a general principle the trial should take the form of a cohesive whole, and that unless it is clear that it is ‘just and convenient’, in the preliminary issue context, for a specific matter to be ‘hived off’ from the general issue, or, within the ‘split trial’ context, for the question of liability to be separated from issues of consequential loss/damage, the court ought not to accede to applications therefor.

20. In short, the benchmark must be one of judicial caution before sanctioning a departure from the general procedural rule, and with that in mind I turn to the manner in which this particular application was framed.

The argument

21. The parameters of the plaintiff’s application for a split trial are set out in terms on the face of the summons dated 21 April 2008, the terms of which have required minor amendment consequent upon the recent filing of the Defence to the claim, it being said by the plaintiff that it remains unclear if the defendant in fact accepts that it is Texas law which should govern the issue of contractual formation.

22. Accordingly, as amended, the Order for which the plaintiff now contends is that:

“1.   The following issues of liability of the defendants to the plaintiff in this action be tried separately before the issue of damages, namely:

   (a)   Whether in fact the 1^st defendant ever signed the appendix to the contract/contract document;

   (b)   If the 1^st defendant did not so sign (or is not established to have so signed):

(i)    Under Texas law, or such other law as may be held to govern the question of whether a binding contract arose, and on the material facts, is the effect of the first sentence of clause 21.1 of the contract such that (leaving aside questions of waiver and estoppels) no binding contract arose;

(ii)  If not, then either:

(A)    did the parties waive the provisions of the first sentence of clause 21.1; or

(B) is the 1^st defendant estopped from denying the existence of a binding contract;

(C)    If a binding contract did arise between the plaintiff and the 1^st defendant:

(i)  was such contract subject to the condition precedent or collateral contract alleged in paragraph 4(c) of the Defence of the 1^st defendant; and

(ii) if so, was the 1^st defendant thereby relieved of any liability under the contract.

2.    Subject to the determination of the issue of liability in favour of the plaintiff, the issue of damages be tried subsequently in such manner as may be directed by the Commercial Judge.”

23. For the purpose of this judgment I am assuming that the foregoing encapsulates all of the issues of liability as raised on the pleadings, notwithstanding that the carriage to the Order sought is couched in terms of “the following issues of liability”. 

24. Certainly Mr Strachan, who moved this application on behalf of the plaintiff, did not indicate otherwise, and for present purposes, therefore, I approach this application on the basis that that which now is sought is a ‘split trial’ in the ordinarily accepted sense, and thus that there are no ‘hanging’ issues of liability outwith the rubric as set out on the face of the summons.

25. The nub of Mr Strachan’s argument was that the circumstances of this case made it very clear that the ‘just and convenient’ course for the court to adopt towards this litigation was to try the relatively straightforward issue(s) of liability as thus analysed, before commencing to judge the far more complex issues of the quantum of damage.

26. This was, as he attractively observed, a case with “a short head of liability and a long tail of damages”, by which he meant that there was a comparative simplicity in the liability analysis when compared with the question of damages, which contained within it some difficult points in terms of causation and remoteness, and indeed in terms of pure quantum, including the issue of mitigation of damage.

27. The trial of these “tight” and “neatly contained” liability issues would, he said, take 3-4 days at most, with relatively few witnesses being required on either side.

28. By contrast, Mr Strachan referred to the manner in which the damages issues variously are pleaded within the ‘Loss and Damage’ head within paragraphs 21 and 22 of the Re-Amended Statement of Claim, noting that as presently pleaded the damages issues are “curiously extensive”, and suggested that if and in so far as the damages issue was to be tried with that of liability, the parties and the court were most certainly looking at a multi-week trial.

29. Thus, Mr Strachan submitted, a ‘split trial’ of this case, in the manner as now mooted by the plaintiff, would serve to save very considerable sums in costs on both sides if the court were to be against the plaintiff on liability, thereby rendering otiose the issue of quantum.

30. This most certainly was not a purely tactical application, he said, given that it had been taken out prior to the outstanding application for discovery as issued by the defendant.  The fact that, potentially at least, witnesses on both sides would, or may have to be, called twice should this litigation thus be ‘split’ should not be a consideration which should carry undue weight – it was frequently the case, said Mr Strachan, that when an order was made for a split trial that one or more witnesses would have to be called twice.

31. Accordingly, in the present case it was envisaged that Mr Utley of the plaintiff would give his evidence at the liability stage, and thereafter, at the damages trial, if such be necessary, he would give evidence in respect of the various matters which arose in relation to the plaintiff’s claim.  By contrast, however, it was highly unlikely that any, or any significant, evidence would have to be given by the 1^st defendant’s personnel in respect of his client’s damages claim, which inevitably would require evidence from the plaintiff and the plaintiff’s supplier of these used rails.

32. As to the foreign law element, Mr Strachan submitted that experts on Texas law equally would have to give evidence at both the liability and quantum trials if, absent agreement between the parties, there were to be issues as to principles of Texas law about first, the intention to contract, and second, as to recoverable heads of damage.

33. However, notwithstanding the potential calling of evidence from certain witnesses on two separate occasions, the fact remained, counsel said, that the liability and damages issues were clearly distinct, and should be regarded as such in terms of the manner in which this case is brought to trial.

34. As to the position of the 4^th defendant, Mr Chu Kin Wah, a director of the 1^st defendant, who now was the only other defendant in the proceedings as constituted post-amendment – at the outset of this litigation there had been 5 defendants but the original 2^nd, 3^rd and 5^th defendants had been deleted at the stage of the first amendment of the plaintiff’s claim – Mr Strachan noted that this was an aspect of the case which had concerned the court at the first hearing of this application prior to its adjournment.  In this regard he said that he now was able to state on behalf of his client that whilst the plaintiff had a viable claim against Mr Chu in the tort of deceit (vide paragraph 37 of the pleading), nevertheless it was recognized that the main claim lay against the 1^st defendant company, and that should there be an order for a split trial as against the 1^st defendant it was not an attractive prospect to invite the court thus to leave alive and outstanding the entirety of the claim against the 4^th defendant.

35. Accordingly, counsel said, in the event that an order for a split trial were to be made by the court on this application, the plaintiff would undertake to withdraw its claim against the 4^th defendant.  Conversely, however, it would be unsatisfactory for the plaintiff to abandon its claim against the 4^th defendant irrespective of the outcome of this application, and thus if it were held to be inappropriate to order a split trial on the issues of liability and damages as against the 1^st defendant, the plaintiff would maintain its present claim against the 4^th defendant.

36. In opposition to this application by the plaintiff, Mr Ronny Tong SC, on behalf of the 1^st defendant, took a firm and uncompromising stand.

37. The essence of his submission was that whilst he had no difficulty in accepting the relevant principles applicable to this debate, he had every difficulty in accepting Mr Strachan’s primary thesis that there was, and is, a clear line of demarcation between the issues of liability and quantum in terms of the plaintiff’s case against his client.

38. To the contrary, he said.  Far from being a clear and recognizable delineation, thereby permitting a convenient separation of liability and quantum, from his side of the bar table the perception was that these issues were inextricably connected.

39. Mr Tong made no secret of his client’s considerable scepticism about the merit of the plaintiff’s claim, and at the outset of his address observed that this was the first occasion he could remember when an application of this nature had emanated from a plaintiff, as opposed to a defendant; could it be, he asked rhetorically, that this application constituted implicit recognition by the plaintiff of the tenuous nature of the claim as now mounted against his client, and that there was a clear agenda at work in terms of a potential saving in costs if all did not go accordingly to plan upon the liability issue?

40. He suggested that the court should be careful indeed before acceding to the considerable charm of Mr Strachan’s submissions, and he struck a note of immediate discord in expressing his disagreement with the suggestion that this case represented but a ‘short liability exercise’.

41. His client would say that, contrary to the plaintiff’s claim as now asserted, the plaintiff never had had any supply contract for these rails, and that the reason that no standby credit had been opened was because of the very real fear of his client that the plaintiff was not worth powder and shot, and that if the credit were to be wrongly drawn down, his client would not be able to recover what was a considerable sum of money.

42. He further suggested that if there was a supply contract as alleged, nevertheless in substance this was as much a liability issue as a quantum issue, and that it was perfectly possible that the binding nature or otherwise of such contract would be a matter of Argentinian law, which potentially would introduce another disparate element into the foreign law equation.

43. Moreover, said Mr Tong, when the plaintiff’s estoppel plea was specifically considered, the drawing of a clear-cut line between liability and quantum issues would be very difficult, and in any event his client did not share the plaintiff’s optimism that on the liability issue few witnesses from the 1^st defendant would be necessary – and even were this to be the case, which was disputed, his client saw no reason why potentially its witnesses may be required to give evidence on two separate occasions, with commensurate waste in terms of executive time and costs.

44. At the end of the day, concluded Mr Tong, the highest that this application can be put is that the case for a split trial is “arguable at best”, and in a case wherein there were, in his submission, a “multitude of overlapping and contraversial issues”, the argument as now made on behalf of the applicant simply failed to meet the benchmark of “the exceptional case” wherein it clearly is ‘just and convenient’ to accede to an application of this type.

45. Finally, noted Mr Tong, if and in so far as this application represented a genuine attempt to save costs, which he doubted, the further rationale, as floated by the plaintiff in counsel’s skeleton argument, to the effect that an initial liability finding in favour of the plaintiff may serve to stimulate a settlement with the 1^st defendant was simply empty rhetoric as far as his client was concerned – this just “was not going to happen”.

Decision

46. So persuasively did the respective advocates do their jobs that I have taken several days to reflect on this matter, and more particularly to take the opportunity to read the case papers in greater detail.

47. At the end of the day, and notwithstanding Mr Strachan’s cogent submissions, I have come to the conclusion Mr Tong is correct, and that to be persuaded to order a ‘split trial’ in the present case would be to venture into dangerous waters.

48. In fact, as the prospective trial judge, I would go further and express the view that a bifurcation of the trial in the manner for which the plaintiff now contends may well prove a recipe for acute procedural problems, in terms both of further interlocutory applications and of the conduct of the trial of such ‘liability issue(s)’.

49. For my part, should this dispute be dealt with as the plaintiff now wishes, I can foresee repeated arguments as to the correct characterization of disparate issues, and whether such are to be regarded as questions of ‘liability’ or of ‘quantum’. 

50. In this regard, for example, Mr Tong took the court to the forthcoming discovery application on the part of the 1^st defendant – the hearing of which, I gather, now is scheduled for 8 July – in which he demonstrated, with reference to the 1^st defendant’s ‘Schedule of Discovery’, that is, the categories of documents which it now was sought to obtain by way of discovery from the plaintiff, that there was a marked divergence of view: whilst the plaintiff apparently saw this as discovery relating solely to quantum, so far as Mr Tong was concerned, 11 of the 12 documentary categories specifically went to the issue of liability, with the remaining item a mixture of the two. 

51. The court thus immediately is confronted with an example of starkly differing views within the context of an imminent discovery application, and, with respect, I can foresee this scenario repeating itself in other contexts, albeit discovery is an obvious candidate for disagreement of this type.

52. The relevance of this latter point is emphasised by the case of Baldock v. Allison & ors [1995] 1 WLR 158, a copyright action wherein a split trial of the issues of liability and damages had been ordered, and wherein the defendants had submitted on the hearing of a summons for directions that discovery should be limited to the issue of liability.  This contention was not accepted by the Master hearing the summons, and in allowing the defendant’s appeal therefrom Lightman J held that whilst the ambit of the court’s powers to order discovery extended to “matters in question in the action”, the court should in all ordinary cases of a split trial, and in the absence of special circumstances, exercise its discretion in favour of limiting discovery to the issue of liability, and that the decision in any particular case involved balancing, on the basis of evidence, the interests of the parties, how impelling the need for information was, and how expensive and intrusive such discovery would be.

53. This narrow approach appears to have been followed in principle by the English Court of Appeal (Lord Justice Millett and Sir Brian Neill) in Kapur v. JW Francis and Co and Another, unrep., a short abstract of which appears in The Times of 4 March 1998, wherein the court held that in ordering the separate trial of liability and quantum, a judge had a discretion whether and to what extent discovery should be ordered, but, prima facie, no discovery should be ordered of matters on an issue which might never be tried.

54. These decisions strike me as correct (although for present purposes it is unnecessary to express any final view), and in my view they serve to emphasise the necessity to be able easily and fairly to differentiate an issue of liability from an issue sounding purely to quantum.

55. Nor are potential interlocutory problems the sole consideration.  At any trial of liability alone, for example, I am inclined to agree with Mr Tong that the difficulty of easily ‘pigeonholing’ issues into those of liability on the one hand and quantum on the other may well produce problems in the conduct of the trial both for counsel and the bench, and in cross-examination in particular in terms, for example, of whether a line of questioning is relevant and well-founded.  And if and in so far as the ‘line’ is blurred between the two concepts, and the questioning proceeds, the evidence so garnered may require to be identified and marshalled at a subsequent hearing on quantum, if such transpires to be necessary. 

56. Forensic difficulties can, of course, always be overcome, but for my part, and save in the most obvious case wherein the advantage of separation of the dispute into liability and quantum is plain – and in this regard clearly every case is ‘fact-sensitive’ – I see no merit in unnecessarily creating potential problems in terms of the conduct of a trial, nor, for that matter, of effectively tying the hands of the court at the outset by thus restricting the inquiry and the ambit of the evidence of any particular witness in a case of this relatively complex nature.

57. Looked at in the round, therefore, it strikes me that however optimistically the plaintiff and its advisers may perceive this litigation in terms of ‘clean’ and immediately recognizable issues susceptible to neat (and hopefully quick) resolution, the overwhelming probability is that dispute is not going to turn out to be ‘clear-cut’, and is likely to be redolent with disputed issues of fact wherein the issue of whether there is a valid and binding contract between these parties is, or will be seen to be, irrevocably intertwined with disputed facts in the area of quantum – and not least when, as here, matters of causation and remoteness also are in play.

58. At the end of the day, interference with procedural rules/procedural approaches which have stood the test of time – and which are enshrined in that repository of learning colloquially known as the ‘White Book’ – are to be varied only with considerable hesitation, hence the principle that whilst exceptional cases occasionally may warrant a departure from the norm, the general rule is that all the issues in a case are, as a matter of primary principle, to be decided at the same time.

59. In my judgment, and doing the best that I can on the necessarily limited state of my current knowledge of this dispute, my instinct tells me that the present case is not such an exceptional case; indeed, I am tempted to surmise that, when eventually one has the benefit of hindsight, this case may prove to have been a paradigm example of when not to embark upon such a liability/quantum separation.

60. I further take the firm view that any such division of a case into the distinct elements of liability and quantum also must be recognized to be worth the ever-present risk of any initial liability judgment being appealed up the ‘court chain’, with that first instance judgment eventually being returned to sender and either confirmed or set aside or varied – in which case the quantum issue, which on this hypothesis has lain dormant whilst liability alone has been decided and thereafter appealed, potentially may be required to be determined long after the initial trial on liability, and at a time when it may no longer be in the ability of the parties conveniently to assemble the necessary evidence for the proper disposition of this issue.

61. Hence the necessity for the exercise of considerable caution before being persuaded to depart from the normal rule, caution which in my view is well-founded in this particular instance.

Order

62. It follows from the foregoing that the order of this court on the plaintiff’s application for a ‘split trial’ is as follows:

1.   The plaintiff’s application by summons dated 21 April 2008 is dismissed;

2.   There be a costs order nisi that the costs of and occasioned by this application be to the 1^st defendant, such costs to be taxed if not agreed.