XCHRX GROSS FORTUNE INTERNATIONAL LTD. v. SET WIN INTERNATIONAL LTD.

HCA1584/1998

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.1584 OF 1998

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J U D G M E N T

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The appeal

1. The plaintiff succeeded before the Master in striking out part of paragraph 10 of the Defence. The defendant now appeals against the decision of striking out by the Master.

The pleadings

2. The plaintiff is the vendor of some shop premises. It pleaded that in breach of an agreement for sale and purchase ("the sale agreement") of the shop premises, the defendant, as the purchaser, had failed to pay the balance of the purchase price. The plaintiff claimed for the forfeiture of the deposit paid by the defendant as well as for damages. The defendant pleaded that the plaintiff had breached certain implied terms of the sale agreement in that there were defects in the standard and quality of the shop premises. The relevant part of paragraph 10 of the Defence pleaded that :

"... As a result thereof, there were discussions between the Plaintiff and the Defendant concerning the Plaintiff's remedying the said breaches and/or the defects in the construction, finishes and fittings of the Property and the common corridors referred to in paragraph 9(a) above. In the premises, it is averred that by reason of the parties' conduct in entering into negotiation aforesaid, there was an implied agreement between the parties that in consideration of the Defendant's not taking immediate steps to enforce the Defendant's right against the Plaintiff for the Plaintiff's breaches of the Agreement, the Plaintiff would not require the Defendant to complete the Agreement until the Plaintiff had fully rectified the defects or until the parties has reached an mutually agreeable arrangement regarding the Plaintiff's remedying the defects."

3. In its reply, the plaintiff expressly denied that it was in breach of the obligations under the sale agreement. It pleaded that the 'without prejudice' discussion did not lead to any agreement, and that the defendant is not entitled to rely on the 'without prejudice' discussion.

Basis of striking out

4. The plaintiff applied to strike out paragraph 10 on the basis that it is frivolous and vexatious and is an abuse of the process of the court. The plaintiff contended that the negotiation referred to in paragraph 10 was commenced at the beginning of December 1997. It was conducted on a 'without prejudice' basis and was evidenced by a series of 'without prejudice' correspondence and documents, many of which are marked 'without prejudice'. These documents showed that the negotiation was conducted and agreed to be conducted on a 'without prejudice' basis, leading to various steps being taken to attempt to settle the dispute (which proved to be unsuccessful) including the offer and counter-offers of various formulations of a settlement agreement. To permit the defendant to rely on such 'without prejudice' negotiation in the way as pleaded in paragraph 10 would be totally contrary to the 'without prejudice' rules. Further, the implied agreement of deferring the completion of the sale agreement until the parties should have reached a mutually agreeable arrangement is totally contradicted and destroyed by the contents of the 'without prejudice' correspondence and documents.

List of documents

5. The plaintiff had previously applied to remove from the list of documents of the defendant the 'without prejudice' correspondence. It was successful before the Master but the decision was reversed on appeal to Chung J whose decision was affirmed by the Court of Appeal.

The defence

6. The defendant now contended that the plaintiff's application to strike out is an abuse of the court's process because it is seeking to reverse the Court of Appeal decision through the back door.

7. The defendant contended that the joining of the issues set out the ambit of the trial which includes :

(1) whether the discussion between the plaintiff and the defendant had led to an agreement; and

(2) whether the correspondence of discussion are in substance and in the context provided by the 'without prejudice' rules.

8. Ms To referred to Chitty on Contracts 28th Ed. Vol.1 para 2-104 to 105 in which the authors stated that the agreement may be complete although it is not worked out in meticulous detail and also an agreement for sale of land dealing only with the barest essentials may be regarded as complete if there was clear intention of the parties. Ms To argued that in paragraph 10, the agreement was pleaded and the consideration was pleaded. The intention was to have an agreement. Ms To referred to the earlier judgment of Chung J in which he stated that :

"While it is true that paragraph 10 of the defence only pleaded an implied agreement, 'and not a settlement agreement,' it is arguable as to (a) whether the pleaded agreement was in substance, a settlement agreement, and/or (b) if not a settlement agreement, whether it is arguable in law that the exception to the rule excluding without prejudice communication extends to an agreement not in the nature of a full settlement."

Ms To submitted that whether there was an agreement should be tried.

The implied agreement

9. It is well established that striking out should be made in plain and obvious cases. Whether an agreement has been reached, be it expressly or impliedly, is a matter of fact. For the purpose of the striking out application, I think the plaintiff has to proceed on the basis that if, according to paragraph 10, an agreement had been reached by implication, it would not assist the defendant in any way because of some principles of law.

10. It is necessary to examine closely on how paragraph 10 is pleaded. One is bound to say immediately on looking at paragraph 10 that this part is pleaded in vague terms. Paragraph 10 refers to the discussion between the parties. It then said "an implied agreement arises by reason of the parties' conduct in entering into the negotiation". It is not the pleaded case of the defendant that the negotiation led to a concluded agreement, but rather it was by reason of the parties' conduct in entering into negotiation that there was an implied agreement between the parties. In my view the parties may well have agreed to negotiate, but an agreement to negotiate is certainly not one recognised as an enforceable contract. This is well established in Walford v. Miles [1992] 2 AC 128, where Lord Ackner at page 136 stated that :

"Mr. Naughton accepted that as the law now stands and has stood for approaching 20 years, an agreement to negotiate is not recognised as an enforceable contract. This was first decided in terms in Courtney & Fairbairn Ltd. v. Tolaini Brothers (Hotels) Ltd. [1975] 1 W.L.R. 297, where Lord Denning M.R. said, at pp. 301-302 :

'If the law does not recognise a contract to enter into a contract (when there is a fundamental term yet to be agreed) it seems to me it cannot recognise a contract to negotiate. The reason is because it is too uncertain to have any binding force ... It seems to me that a contract to negotiate, like a contract to enter into a contract, is not a contract known to the law ... I think we must apply the general principle that where there is a fundamental matter left undecided and to be the subject of negotiation, there is no contract.'"

11. Further the implied agreement relied by the defendant is that the plaintiff would not require the defendant to complete the agreement until the plaintiff had fully rectified the defects or until the parties have reached an mutually agreeable arrangement regarding the plaintiff's remedying the defects. Clearly, the alternative plea points to the non-existence of any concluded agreement between the parties. The parties have yet to agree on the essential terms when they entered into the negotiation.

12. On this basis alone, in my view, the plaintiff is entitled to succeed in the striking out. When Chung J made his comment, he was considering the issue of removing the documents from the list. I do not think he was addressed with the issue now in this application. The matter is not one of lack of particulars of paragraph 10 but rather whether the plea of the implied agreement is valid in law.

'Without prejudice' principle

13. As to the nature of the 'without prejudice' rule, Lord Griffiths in Rush & Tompkins Limited v. Greater London Council and Another [1989] 1 AC 1281 at 1299 stated that :

"The 'without prejudice' rule is a rule governing the admissibility of evidence and is founded upon the public policy of encouraging litigants to settle their differences rather than litigate them to a finish. ...

The rule applies to exclude all negotiations genuinely aimed at settlement whether oral or in writing from being given in evidence. A competent solicitor will always head any negotiating correspondence 'without prejudice' to make clear beyond doubt that in the event of the negotiations being unsuccessful they are not to be referred to at the subsequent trial. However, the application of the rule is not dependent upon the use of the phrase 'without prejudice' and if it is clear from the surrounding circumstances that the parties were seeking to compromise the action, evidence of the content of those negotiations will, as a general rule, not be admissible at the trial and cannot be used to establish an admission or partial admission. ..."

14. The defendant relied on Buckinghamshire County Council v. Moran [1990] 1 Ch 623. In that case, next to the house of the defendant was a plot of land which he had always used as his own. The land in fact was acquired by the local authority and an application was made by a third party to carry out work on the plot of land. The defendant wrote to the local authority informing it of his rights to the land. He headed the letter 'without prejudice'. The Court of Appeal held that the privilege attached to correspondence marked 'without prejudice' is to enable parties to a dispute to offer terms of settlement or to negotiate (and in that case it was to negotiate) and since the defendant's letter was in terms of his assertion of his right and was not an offer to negotiate, the letter was not privileged and was therefore admissible in evidence. It is clear from the facts of that case why the label of 'without prejudice' was disregarded by the court.

The correspondence

15. Although Ms To submitted that other than the correspondence, there may be other evidence to be considered, the defendant had never stated by way of affidavit what other matters are involved.

16. The correspondence showed that on 8 December 1997, the plaintiff's solicitor wrote to the defendant's solicitor (the letter was headed 'without prejudice') stating that :

"As to your client's request for additional work to be carried out, our clients are under no obligation to comply with the same. However, as a gesture of goodwill and without any admission of liability, our clients will still be prepared (to) consider the request. Your client is requested to submit the list of additional work required to be carried out for our clients' consideration." (my emphasis)

On 16 December 1997, the plaintiff's solicitors again wrote stating that :

"On an entirely 'without prejudice' basis and without any admission of liability. We are instructed that our client will send along a representative on 18 December 1997 afternoon to assist in the inspection of the above properties." (my emphasis)

17. On 19 December 1997, the defendant's solicitors wrote on an open letter stating that, "in order to enable us, our architect, to prepare a list of interior design and decoration etc, we should be obliged if you should kindly let us have the complete set of the following documents." It then set out the various plans that it required. On the same day, the defendant's solicitor informed the plaintiff's solicitors that "As requested by you, we agreed that the said letter (i.e. the letter of 19 December 1997) should be marked with the words 'without prejudice'."

18. By letter dated 30 December 1997, the plaintiff's solicitors wrote :

"Without admission of your client's allegations and without prejudice to our client's rights generally, we are pleased to send you a draft Supplemental Agreement for your approval on behalf of your client." (my emphasis)

19. In the draft agreement which was headed 'without prejudice' paragraph 5 stated :

"5. For the avoidance of doubts, nothing herein shall be treated or construed as an admission by the Vendor of any defect in the condition of the Property." (my emphasis)

20. In a letter dated 31 January 1998, the defendant's solicitors wrote stating that :

"Although complaints regarding the interior of the premises were raised in the letters marked 'without prejudice', that does not mean they were never raised, they were raised 'without prejudice' to your and our client's rights." (my emphasis)

21. In my view, the defendant is clearly bound by the 'without prejudice' nature of the correspondence. This is not a case of a defendant asserting its rights. It may well be that it did so at the very beginning but certainly what followed after this was negotiation on an entirely 'without prejudice' basis. The defendant, through its legal representative, recognised that the negotiation is 'without prejudice' to the rights of the parties.

Other matters

22. Ms To referred to two letters from the plaintiff's solicitors, both dated 27 March 1997, in which the plaintiff's solicitors sent the conveyancing documents and the draft sale and purchase agreement to the defendant's solicitors. These documents, for some odd reasons, were headed 'without prejudice'. I think the test is that one should look at the substance of the letter, the label put on these two letters is obviously meaningless.

23. Ms To also referred to some letters which do not have the 'without prejudice' label. She questioned whether these amounts to a change in the stance of the position of the parties. I think again one should look at the substance of the letters and the letter from the defendant's solicitors dated 30 December really provides the answer to the question, namely the discussions were 'without prejudice' to the rights of the parties.

24. Ms To also said that an application to strike out ought to be made promptly. The defence was filed in March 1998, the striking out application was only taken out in February 2000. I agree that striking out applications should be made promptly. However, at this stage of the proceedings, the parties are still dealing with discovery. Also as one can see from the bundle of documents that between March and October 1999, the case was taken up with the application dealing with the removal of the documents. I do not think that the delay is such that the court should not entertain the application to strike out at this stage.

Conclusion

25. In my view, the Master is entitled to strike out part of paragraph 10. Accordingly, the appeal is dismissed.