WELL JOINT TRADING LTD v. CHIU CHUNG CHIU AND OTHERS

HCA 1768/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1768 OF 2011

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BETWEEN

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D E C I S I O N

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1.  The plaintiff seeks further and better particulars of the defence filed by the 1^st defendant (“Chiu”) and 2^nd defendant (“Fong”).

Background

2.  In around 2002, the plaintiff became a joint venture owned by an Austrian entity VA Intertrading Aktiengesellschaft (“VAIT”), Chiu and Fong. Chiu and Fong were directors of the plaintiff until they resigned in June 2011.

3.  The plaintiff purchased steel products (including deformed steel bars or “debars”) from VAIT and sold them to contractors in Hong Kong and Macau.

4.  The 3^rd defendant (“D3”) and 4^th defendant (“D4”) were companies owned and controlled by Chiu and Fong and carries on steel trading business as well.

5.  Pursuant to 3 anonymous letters received by the Managing Director of VAIT (“Weigl”), VAIT carried out investigations into the conduct of Chiu and Fong.  In May 2011, it was revealed that through D3 and D4, Chiu and Fong sold steel products purchased by the plaintiff from VAIT to customers at higher price.  Chiu and Fong would forge contracts between the plaintiff and buyers at lower prices, thus pocketing the difference.

6.  Central to this case is whether Chiu and Fong had defrauded the plaintiff by secretly trading in parallel with the plaintiff and misappropriated its assets; or there was an agreement among the plaintiff, VAIT, Chiu and Fong for a third company to be set up.

7.  It is the plaintiff’s case that Chiu and Fong were engaged in a scheme to defraud it.  An example of the fraudulent scheme was a transaction with E Man Construction Co. Ltd. (“E Man”) as buyer.  There were 2 sales contracts both dated 1 December 2004 with the same description of debars and with E Man as buyer.  One contract was entered into with the plaintiff with the sale price of $16,056,000; and the other with D3 was for $16,290,000.  It is alleged that Chiu and Fong and/or D3 pocketed the difference of $234,000.

8.  It is the plaintiff’s case that Chiu and Fong had acted in breach of directors’ duties and that D3 and D4 had dishonestly assisted Chiu and Fong and are liable as constructive trustees to account.

9.  On the other hand, Chiu and Fong allege that the plaintiff had to act in accordance with certain policy of VAIT which resulted in the plaintiff lacking in flexibility to meets the needs of many end-buyers in Hong Kong. Hence, the plaintiff, VAIT, Chiu and Fong agreed that another steel trading company (“the third company”),  which should not be owned by VAIT, should be deployed so that some of the end buyers should enter into contracts with the third company instead of the plaintiff.  The steel products supplied to the end buyers should still come from the plaintiff or VAIT, and the third company should pay the plaintiff for them.  Allegedly, it was agreed that the third company should maintain financial independence.

10.  The plaintiff, VAIT, Chiu and Fong agreed that D3 should play the role of the third company and D3 was actually deployed to and actually played such role.  In about 2006, in view of the persistent loss suffered by D3, the plaintiff, VAIT, Chiu and Fong agreed that D4 should take over part of the role of D3.

11.  As regards the E Man contracts, the difference of $234,000 was “contingent expenses not foreseen at the time when the original contract was signed between the plaintiff and E Man.  Since such amount should be borne by E Man, another contract between D3 and E Man was signed by D3, who was playing the role of the third company, in order to cover the said expenses.

12.  In reply, the plaintiff avers that neither it nor VAIT had ever authorized its business to be traded with D3 and D4.  It denied the agreement to set up the third company or to let D3 and D4 play the role of the third company.  It also denied any agreement for D3 and D4 to retain the profits.

13.  The plaintiff sought further and better particulars of these defences.  Chiu and Fong gave answers to some requests but declines to answer the rest, all on the ground that it was “not a proper request for further and better particulars”.  The plaintiff is not seeking further and better particulars of answers given at present but pursues the unanswered requests. At this hearing, Mr Chai, counsel for the Chiu and Fong, submits that no order should be made unless the particulars sought are necessary.

The legal principles

14.  The applicable principles are not in dispute and have been set out in the respective skeleton submissions of counsel which I adopt: 

“Order 18, rule 12(1) of the Rules of the High Court provides that every pleading must contain the necessary particulars of any claim, defence or other matter pleaded. The requirement to give particulars reflects the overriding principle that the litigation between the parties, and particularly the trial, should be conducted fairly, openly, without surprises and, as far as possible, so as to minimize costs: Hong Kong Civil Procedure 2012, Vol 1, para 18/12/111.”

15.  The functions of particulars are as follows:

“(1) inform the other side of the nature of the case they have to meet as distinguished from the mode in which that case is to be proved;

(2) prevent the other side from being taken by surprise at the trial;

(3) enable the other side to know what evidence they ought to be prepared with and to prepare for trial;

(4) limit the generality of the pleadings, the claim and the evidence;

(5) limit and define the issues to be tried, and as to which discovery is required; and

(6) tie the hands of the party so that he cannot without leave go into any matters not included (although if the opponent omits to ask for particulars, evidence may be given which supports any material allegation in the pleadings).

…

Never before as much as now

None of the basic rules of pleading have anything to do with technicality. All of them have everything to do with practical justice. They have always been of importance. Never before as much as now. For these days, there are more and more cases so vast and so complex that they push practically to its limit our system's capacity effectively to cope with them. Any laxity in their proper management, whether in regard to pleadings or anything else, can all too easily result in such cases spinning into confusion if not chaos - even before trial but especially at trial. The present case, for the trial of which half a year has been reserved, is such a case.” Aktieselskabet Dansk Skibsfinansiering v Wheelock Marden & ors [1994] 2 HKC 264 at 269H to270A, 270D to 270E

16.  Further, as Mr Justice Ma CJHC (as he then was) said in Wing Hang Bank Limited v Crystal Jet International Limited [2005] 2 HKLRD 795, at 799A-F:

“(1) The purpose of pleadings is fairly and precisely to inform the other side of the stance of the pleading party so that proper preparation is made possible, and time and effort are not expended unnecessarily on other issues. The passage at paragraph 18/12/1 of Hong Kong Civil Procedure 2004 Volume I sets out the rationale for proper pleadings.

(2)  In a trial, particularly where evidence is given by witnesses, it becomes extremely important that each side knows exactly what are the live issues.  Where issues are sought to be introduced that have not been adequately or properly pleaded, amendments must be sought unless the consent of the other party or parties has been obtained.  It will simply not do for unpleaded issues to be ‘slipped in’ when evidence is being given in the hope that the other side is not sufficiently alert to object.  Much testimony given in the course of a trial may in truth relate to a number of possible aspects or may simply be background information.  Obviously, counsel must be astute to object when necessary but the primary responsibility of ensuring that any issue is properly before the Court is on the party seeking to advance that issue.  He must do so clearly and not ambiguously, and the usual way of doing so is through the pleadings.  Care must be taken to plead issues clearly, and not draft pleadings either vaguely or ambiguously perhaps in the hope that the other side might not readily or easily understand a party’s real case.  While vaguely or ambiguously drawn pleadings may enable a party to escape a strike out application (since striking out is only for plain and obvious cases), this is not to say that where a court has to decide whether or not an issue is to be permitted to be run, it will smile kindly on such types of pleading.”

17.  It must not only be shown that particulars are relevant but that they are also necessary.

“Where application is made by the parties themselves, it is for the party applying for the order to satisfy the Court that the order is necessary either for disposing fairly of the cause or matter, or for saving costs. Unless the Court makes the order of its own motion, the burden and onus of so proving rests upon the party bringing such application.

It is not enough for the applicant merely to show that the particulars requested are ‘relevant’: for ‘relevance’ is not the rest proscribed – it must be shown that granting an order for those particulars is ‘necessary’ for one or more of the purposes stated and set out in para.(3B), which provides for an exhaustive and conclusive definition of what can be (and only those can be) considered by the court to be ‘necessary’ (namely, only for disposing fairly of the cause or matter, or for saving costs.).” Hong Kong Civil Procedure 2012, 18/12/66.

“…However, if the only object of the summons is to obtain the names of witness or some other clue to the evidence of the other party, it will be dismissed (Temperton v Russell (1893) 9 TLR 319 at 321; Briton Medical Association v Britannia Fire Association (1888) 59 LT 888)…” Hong Kong Civil Procedure 2012, 18/12/48

18.  I now turn to the specific requests for particulars.

Paragraph 7(b) of the defence

19.  The plea is “that the plaintiff, VAIT, [Chiu and Fong] agreed that, in order to deal with the unsatisfactory situation and for the purpose of facilitating the business of the plaintiff and VAIT, another steel trading company (“the third company”), which should not be owned by VAIT and therefore would not be subject to the policy of VAIT, should be deployed such that some of the end buyers should enter into contracts with the third company instead of the plaintiff.  ...”.

20.  Chiu and Fong gave particulars to the time frame for reaching that agreement as 3 years, i.e. between 2002 and 2005. They also stated the form of the agreement (oral) and the person who entered into the oral agreement on behalf of the plaintiff and VAIT (Woergerer).

21.  The plaintiff pursued the request for particulars as to:

(c) how the agreement was reached;

(e) who would decide pursuant to the terms of the agreement that the contracts would be entered through the third company instead of the plaintiff; and

(f) how the goods purchased by the plaintiff from VAIT should be transferred/invoiced to the third company pursuant to the terms of the agreement.

22.  Mr Chai submits that these are requests for evidence and the undefined breadth of the request made the request improper in any event.

23.  On request (c), stating that an agreement was reached orally in 3 years was inherently inadequate.  The circumstances under which the oral agreement was reached should be particularized (e.g. whether it was reached in one or a series of meetings; in one or more telephone conversations).  Otherwise, how can the plaintiff know what case to meet?  How is the witness able to prepare for evidence of what happened over those 3 years?

24.  On request (e), the plea was that only “some of the end buyers” would enter into contracts with the third company instead of the plaintiff.  Chiu and Fong declined to give the particulars on the ground that it was a request for evidence.  Moreover, Mr Chai submits that as the plaintiff’s case is that there was no agreement at all, who actually made the decision cannot be necessary particulars.  With respect to Mr Chai, inherent in the plea is that someone must have been making decisions on behalf of the plaintiff or the third company as to the corporate entity through which the sale to the end buyer would be effected.  The answer to this request for particulars is relevant and necessary to ascertain the terms of the alleged agreement, whether the plaintiff/VAIT had agreed to the terms, and define the scope of discovery and investigation.

25.  On request (f), Mr Chai submits that the request concerns the details of the operation of the third company. Since the plaintiff’s case is that there was no agreement at all, how the goods were delivered and how the third company was invoiced could not be necessary particulars.  It was a request for evidence.

26.  With respect to Mr Chai, the defence is that the third company would enter into contracts with the end buyers.  The plaintiff/VAIT would still be the supplier of steel products. Noting that Chiu and Fong allege that the products were legitimately sold by the third company, the missing link is how the goods of the plaintiff/VAIT would be passed on to the third company or the end buyer?  Was there e.g. a contract between the plaintiff/VAIT and the third company?  Given that Chiu and Fong were handling the local sales, marketing and daily operations of the plaintiff before they resigned, it is particularly important for them to answer this request to show how the products sold were accounted for pursuant to the terms of the alleged agreement.  It goes to the core of whether Chiu and Fong had acted fraudulently in appropriating the plaintiff/ VAIT’s products for Chiu and Fong’s own benefit.

27.  As will be seen from the ensuing paragraphs, a few requests are similar to requests (c), (e) and (f).  The reasoning in paragraphs 23, 24 and 26 is equally applicable.

Paragraph 7(c) of the Defence

28.  The plea is that the plaintiff, VAIT, Chiu and Fong agreed that the third company should maintain financial independence.

29.  Chiu and Fong gave the same particulars as for paragraph 7(b) of the defence.  They refused to give particulars as to how the agreement was reached.  Mr Chai submits that if the plaintiff was truly asking for the specific question as to whether this agreement was part and parcel of another agreement or a separate independent agreement reached at some other time, instead of putting a blanket question “how”, the plaintiff should have made such request or even made a simple request as to “when” the agreement was reached.  In any event, Mr Chai submits that the answer to the plaintiff’s question has already been provided in paragraph 7(c) of the defence which starts with the words “at the same time”.

30.  The agreement referred to in paragraph 7(c) of the defence might well be made at the same time as that referred to in paragraph 7(b).   That means the former suffers the same deficiency in particulars as the latter.  I repeat my analyses in paragraph 23 above.

Paragraph 7(d) of the Defence

31.  The plea is that “the plaintiff, VAIT, Chiu and Fong agreed that [D3] should be deployed to play the role of the third company and [D3] was actually deployed to play and actually played the role of the third company.”

32.  Chiu and Fong gave the same particulars as for paragraph 7(b) of the defence.

33.  The plaintiff pursued the rest of the request as to:

(c) how the agreement was reached;

(e) the full particulars (such as dates, customer names, invoice numbers and amounts) of the instances in which D3 actually played the role of the third company;

(f) who decided that the contracts would be entered into through D3 playing the role as the third company instead of the plaintiff; and

(g) how the goods purchased by the plaintiff from VAIT should be transferred/invoiced to D3 playing the role as the third company.

34.  On request (c), I repeat my analyses in paragraph 23 above.

35.  On request (e), Mr Chai submits that this request concerns the details of the operation of the 3^rd defendant as the third company.  The plaintiff’s case is that there was no agreement at all.  The request effectively asks for the full history and details of D3’s business operation which cannot be necessary.  It is a request for evidence.

36.  As it is Chiu and Fong’s case that only some end-buyers were working with the third company, it will narrow the scope of discovery and investigation with those end-buyers if Chiu and Fong are to give the particulars sought.  However, some of the “full particulars” such as invoice numbers and amounts are matters of evidence.  I will therefore require Chiu and Fong to provide only the customer names and dates.

37.  On request (f) and (g), Mr Chai submits, again, that the plaintiff’s case is that there was no agreement at all.  The request was effectively asking for details of the operation of the 3^rd defendant as the third company, which is unnecessary.  The request is one for evidence.   I disagree and repeat my analyses in paragraphs 24-26 above.

Paragraph 7(e) of the defence

38.  The plea that “in about 2006, in view of the persistent loss suffered by [D3], the plaintiff, VAIT, [Chiu and Fong] agreed that [D4] was established for taking over part of the role of [D3].”

39.  Chiu and Fong gave particulars as to the person who entered into the agreement on behalf of the plaintiff and VAIT (one Erwin Ehrengruber) and the form of the agreement (oral).  They refused to answer the request as to:

(b) how the agreement was reached; and

(d) how the goods purchased by the plaintiff from VAIT should be transferred/invoiced to [D4] playing the role as the third company.

40.  Mr Chai submits that if the particulars needed were when the agreement was entered into or what part of the role D4 had taken, the plaintiff should have made the request more specific. He repeats the submission in respect of request (f) of paragraph 7(b) of the defence. Regarding the complaint that there was no reference to any supporting documentation in respect of the oral agreement, Mr Chai found it difficult to see what the Plaintiff was actually complaining about.

41.  On request (b), I refer to my analyses in paragraph 23 above.

42.  On request (d), I refer to my analyses in paragraph 26 above.

Paragraph 9(b) of the defence

43.  The plea that “at all material times [D3 and D4] were carrying out business in accordance with their role as the third company.”

44.  The plaintiff requested for particulars (such as dates, customer names, invoice numbers and amounts) of the instances in which D3 and D4 carried out business in accordance with their role as the third company.  Chiu and Fong refused to answer on the grounds that as the plaintiff’s case is that there was no agreement at all, the requests which are effectively asking for full history and details of the business operation of D3 and D4 cannot be necessary.  This is a request for evidence.

45.  I repeat paragraph 35 above.

Paragraph 9(d) of the defence

46.  The plea is that “in any event, even if in a particular contract [D3 or D4] should make a profit, such profit was agreed to be made and retained by the plaintiff, VAIT, Chiu and Fong.”

47.  The plaintiff asked for particulars as to:

(a) the date when the agreement was reached;

(b) the names of the individuals who on behalf of the plaintiff and VAIT entered into the agreement;

(c) how the agreement was reached; and

(d) whether the agreement was oral or in writing

48.  Chiu and Fong refused to answer all the requests on the ground that these were not proper requests for particulars.  Mr Chai submitted that in the context of the defence, plainly the agreement was referable to that pleaded at paragraph 7 of the defence.  At paragraph 7(b) of the defence, it has been stated that the agreement in relation to the third company was reached within the period of 2002 and 2005; and at paragraph 7(c) of the defence, it has been pleaded that “at the same time” the agreement regarding financial independence, making/retaining of profit/loss of the third company was reached.

49.  Mr Nip points out that there was no reference in paragraph 9(d) of the defence to any other paragraph.  Reading in the proper context, I accept Mr Chai’s submission.  Mr Nip also accepts that the interpretation of Mr Chai is possible, although Mr Nip wants to eliminate uncertainty.  I do not consider the particulars requested for are necessary provided, of course, Chiu and Fong answer the requests in the preceding parts of this decision.

Paragraph 9(g) of the defence

50.  The plea is that “the difference of $234,000 was contingent expenses not foreseen as at the time when the original contract was signed between the plaintiff and [E Man]. Since such amount should be borne by [E Man], another contract between [D3] and [E Man] was signed by [D3], who was playing the role of the third company, in order to cover the said expenses.”

51.  The plaintiff asked for particulars of:

(a) the persons who signed the original contract on behalf of the plaintiff and E Man;

(b) when the original contract between the plaintiff and E Man was signed;

(c) what the contingent expenses comprised of or related to;

(d) when and who decided that another contract with E Man should be executed by D3 playing the role as the third company;

(e) why it was decided that the further contract should be signed by D3 instead of the plaintiff;

(f) the persons who signed the contract on behalf of D3 and E Man; and

(g) when the contract between D3 and E Man was signed

52.  On requests (a) and (b), Mr Chai submits that it was the plaintiff’s own pleaded case that there was one contract between it and E Man and another between D3 and E Man.  It was also its own case that there was a difference between the 2 contracts and so the 1^st to 3^rd defendants must have pocketed the difference.  At paragraph 9(g) of the defence, the “original contract” was that between the plaintiff and E Man.  The identity of the person who signed the contract was not necessary.  If it was necessary, the plaintiff ought to have pleaded it in the statement of claim.

53.  The reference to the 2 contracts did first appear in the statement of claim as part of the fraudulent scheme of Chiu and Fong. However, Chiu and Fong acknowledged the existence of those 2 contracts in the defence.  I share Mr Nip’s query as to why, if the agreement was to get round the rigidity of VAIT/the plaintiff, there was a contract between the plaintiff and E Man in the first place?   Which of the 2 contracts preceded the other?  The requests are not simply an attempt to get the names of witnesses but to inform the plaintiff of the case it has to meet.  If Chiu and Fong can identify who signed the contracts on behalf of E Man, it narrows the scope of investigation and enables the plaintiff to prepare evidence for the trial.

54.  On request (c), Mr Chai submits that the request was not necessary.  The plaintiff’s case is that there was no agreement that D3 should play the role of the third company or retain the profit.  If Chiu and Fong can establish the agreement, it does not matter what the contingent expenses were.  It remains a matter of evidence.  On the other hand, if the plaintiff establishes the non-existence of the agreement, it leaves a mere question of evidence as to whether the expenses had been incurred.

55.  I respectfully disagree with Mr Chai.  Whether there were really contingent expenses as alleged or secret profits made by Chiu and Fong behind the plaintiff’s back went to the heart of the claim.  It is thus necessary to have particulars of what those contingent expenses covered to understand the nature of the defence.

56.  On requests (d) to (g), Chiu and Fong’s case is that the original contract was between the plaintiff and E Man.  If the contingent expenses should be borne by E Man, the further contract should be signed by the plaintiff and not D3.  Request (e) is necessary to clarify the ambiguity in the defence and to avoid surprises or amendment to pleadings at a later stage.

Conclusion

57.  Save for the requests for

(i) invoice numbers and amounts under request (c) of paragraph 7(d) of the defence;

(ii) invoice numbers and amounts under paragraph 9(b); and

(iii) requests under paragraph 9(d) of the defence,

the plaintiff has established the relevance for the rest of the particulars sought.  All of those particulars are necessary either to enable the plaintiff to know the nature of the defence, the case it has to meet or to ascertain the scope of investigation/ discovery to prepare for the trial.  Chiu and Fong should answer them.

Costs

58.  The plaintiff initially sought further and better particulars by letter.  Chiu and Fong did not respond. After the plaintiff took out the present summons, Chiu and Fong answered some of the requests.  For the rest of the unanswered requests, they did not state clearly their grounds of objection as does Mr Chai in this hearing.  Had they done so, the plaintiff might have clarified its requests and a hearing might have been saved.  In the end, I have decided that Chiu and Fong should answer the bulk of the requests.  Costs should be borne by Chiu and Fong.

Order

59.  I order as follows:

(1) Within 14 days from the date of the handing down of this decision, Chiu and Fong should answer all of the unanswered requests for further and better particulars (except for the request for invoice numbers and amounts under request (c) of paragraph 7(d) of the defence and requests under paragraph 9(d) of the defence).

(2) On a nisi basis, Chiu and Fong do pay the costs of the summons including all costs reserved in relation to it, to be summarily assessed on 27 July 2012 at 4:30 pm on the papers without an attendance.  The plaintiff shall file and serve its statement of costs by 19 July 2012.  The 1^st and 2^nd defendants shall file and serve their grounds in opposition by 26 July 2012.

(3) Any application to vary the order nisi in paragraph (2) shall be made within 14 days by summons supported by affirmation.

60.  I thank counsel for their assistance.