PEI ZHENG MIDDLE SCHOOL AND ANOTHER v. CHINA PUI CHING EDUCATIONAL FOUNDATION LTD AND OTHERS

HCA 946/2003

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 946 OF 2003

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J U D G M E N T

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Applications

1.  This is a passing off action.  The facts are well known to the parties.  It is not necessary to recite them for their benefit.  For those not connected with the case, the facts and disputes have been set out in some detail in paragraphs 1 to 28 of Deputy High Court Judge L Chan’s judgment given on 5 August 2005 in this action.  On appeal, the Court of Appeal affirmed the decision of the Deputy Judge below.  The Court’s judgment dated 21 February 2006 also set out the essential facts in paragraphs 1 to 8.

2.  I will go straight to the application before me.  First, the 1^st, 2^nd and 4^th defendants apply by summons to strike out the re-re-amended statement of claim in respect of the 2^nd plaintiff’s claim against them.  Second, the 2^nd plaintiff makes a cross application by summons to strike out the defendants’ striking out summons.  Third, the 1^st, 2^nd and 4^th defendants apply by separate summons for further and better particulars of the re-re-amended statement of claim, in case their striking out application should fail. 

3.  Neither the 1^st plaintiff nor the 3^rd defendant is involved in these applications.  In this judgment, unless the context otherwise requires, all references to the defendants are references to the 1^st, 2^nd and 4^th defendants only. 

Plaintiff’s cross application based on issue estoppel

4.  I will first deal with the 2^nd plaintiff’s cross application to strike out the defendants’ striking out summons.  It is made on the ground that the issues raised in the defendants’ striking out summons have already been raised, argued and adjudicated upon by Deputy Judge Chan in 2005, whose decision, as described, was affirmed by the Court of Appeal in 2006.  The 2^nd plaintiff therefore argues that there is an issue estoppel, preventing the defendants from raising the same issues again under the striking out summons.

5.  Deputy Judge Chan’s decision dealt with an application by the defendants to stay the 1^st plaintiff’s claim on the ground of forum non conveniens.  An important point raised before the Deputy Judge in that application was whether the 2^nd plaintiff’s claim against the defendants is a viable claim.  If it is, then staying the claim of the 1^st plaintiff in favour of adjudication on the Mainland “will produce no saving in time or resources” (para 51 of Chan DJ’s judgment), as the 2^nd plaintiff’s claim will still have to be tried in Hong Kong.  The Deputy Judge took that factor as well as a number of other matters into account and came to the conclusion that the stay application should not be acceded to.

6.  During the course of argument, the Deputy Judge did raise with Mr Neoh SC, representing the defendants in that application as well as the present applications, whether the hearing should be adjourned for a striking out summons to be taken out by the defendants against the 2^nd plaintiff’s claim if the defendants were, as it seemed to Chan DJ, taking the view that the 2^nd plaintiff’s claim is not viable.  Counsel expressly declined the invitation but reserved his clients’ position relating to any such application in future.  What counsel with customary skill did nonetheless was to continue suggesting in his submission that the 2^nd plaintiff does not have an arguable claim – that he did without taking out a striking out summons or presenting to the Deputy Judge the sort of full and detailed arguments that he has advanced at the hearing before this Court.

7.  As may be expected, the Deputy Judge did not accept the suggestion.  In paragraph 50 of his judgment, he stated expressly that he was “sure” that the plaintiffs’ case of a shared goodwill “is not hopeless either on the pleadings or on the evidence”.

8.  In the notice of appeal filed by the defendants, they specifically raised as a ground of appeal that the 2^nd plaintiff has no viable claim.

9.  However, from what Mr Neoh told me at the hearing (his account was not contradicted) and what I can see from the judgment of the Court of Appeal, those grounds were not really argued at the hearing before the Court of Appeal.  Moreover, the Court of Appeal, whilst affirming the decision below, did not even mention the question of whether the 2^nd plaintiff has a viable claim, when discussing the factors to be taken into account in deciding whether Hong Kong is the most appropriate forum.  Cheung JA, delivering the leading judgment of the Court, simply said that the Deputy Judge had “clearly considered all the relevant factors when he exercised his discretion against the granting of the stay” and therefore there was no room for interference by the Court (paragraph 26 of the judgment).

10.  Mr Liao SC, appearing for the 2^nd plaintiff, therefore argued that the question of whether the 2^nd plaintiff has a viable claim – whether on the pleadings or on the evidence – has already been dealt with in the previous decisions of the Deputy Judge and the Court of Appeal.  Basing himself on the principle of issue estoppel, which is applicable to interlocutory decisions, counsel argued that the defendants’ striking out application amounts to an abuse of process.  He referred this Court to Sanyo Electric Trading Co Ltd v Leung Kwok-hing [1993] 1 HKLR 253, 256-257; Chu Hung Ching v Chan Kam Ming [2001] 1 HKC 396, 401-402; M & R Marking Systems Inc v Tse Mee Shuen Wilson, HCA 1598/2001, Chu J (20 December 2001), paras 19-22 and Re The Prudential Enterprise Limited, HCCW 594/1999, Chu J (24 October 2003), paras 12 and 13, in support of his argument.

11.  I am not with the 2^nd plaintiff.  First, Mr Neoh was right, in my view, in pointing out that issue estoppel only applies to decisions between the same parties.  The decision of the Deputy Judge and the judgment of the Court of Appeal arose out of an application for stay taken out by the defendants against the 1^st plaintiff only.  The 2^nd plaintiff was not involved in it.  On the other hand, the defendants’ present application to strike out is directed against the 2^nd plaintiff.  The 1^st plaintiff is not concerned with the application.

12.  In those circumstances, in my view, issue estoppel does not apply.  It is impossible to regard the 2^nd plaintiff as being privy to the previous decisions of the Deputy Judge and the Court of Appeal.  No such argument was raised. 

13.  I recognise that this is a highly technical point, but it does not detract from the fact that it is a valid one nonetheless. 

14.  Second, in my view, the touchstone for application of the doctrine of issue estoppel, in particular in the context of interlocutory decisions, is “what is just and reasonable” (Chu Hung Ching at p 402A/B).  Looking at what had been raised, argued and adjudicated upon at the hearings before the Deputy Judge and the Court of Appeal, I would say, as a matter of fairness, that the issue of whether the 2^nd plaintiff has an arguable claim had indeed been raised and touched on.  But it had never been seriously argued, particularly at the appellate stage.  A fair way of putting it is that the Court of Appeal simply proceeded on the basis that the 2^nd plaintiff has a viable claim.  As for the hearing before the Deputy Judge, the Deputy Judge certainly felt that the 2^nd plaintiff is not hopeless.  However, that must be read in the context that Mr Neoh had expressly reserved his clients’ position regarding taking out a striking out summons at a later stage in respect of the 2^nd plaintiff’s claim.

15.  In short, in my view, the question of whether the 2^nd plaintiff’s claim is a viable one has never been squarely and properly argued and adjudicated on.  Since the defendants are now raising it before this Court, they are entitled to a substantive answer, one way or another, to the issue.  To deny them that opportunity on the basis that they could and maybe, should, have raised the issue earlier does seem to me to be putting procedure before substance.  In other words, I am not convinced that it is the just and reasonable course to take on the facts of the present case.

16.  For those reasons, I refuse the 2^nd plaintiff’s cross application.  

Striking out application

17.  I now move on to deal with the defendants’ striking out application.

18.  Mr Neoh’s first and foremost point made in support of his clients’ application to strike out is that the 2^nd plaintiff, according to its own pleading, only obtained “the transfer of the administration” of the Hong Kong schools and Macau schools from the school boards of those schools in 1958 (para 5 of the re-re-amended statement of claim).  The schools were not founded by the 2^nd plaintiff.  Nor has it pleaded that there was any proprietary assignment of the schools to the 2^nd plaintiff.  All that has been pleaded is the assignment of the “administration” of the schools.  Mr Neoh therefore contended that the 2^nd plaintiff, as a mere administrator or manager of the schools, cannot possibly have acquired any goodwill in the name “培正” or insignia of the schools, so as to support a cause of action based on passing off against the defendants. 

19.  Mr Neoh submitted that goodwill is incapable of subsisting by itself; it has no independent existence apart from the business to which it is attached.  Star Industrial Co Ltd v Yap Kwee Kor [1976] FSR 256, 269 (PC); CIR v Muller and Co’s Margarine Ltd [1901] AC 217, 223-224.

20.  Mr Neoh also referred this Court to three documents written in Chinese (pp 85 to 87 of the hearing bundle), disclosed by the 2^nd plaintiff for the purpose of proving or evidencing the 1958 transfer of administration.  Counsel argued that the documents simply do not support any argument that there has been a transfer of the schools, as opposed to their “administration”, to the 2^nd plaintiff in 1958, based on which the relevant goodwill could have been passed to the 2^nd plaintiff.  Without such a transfer of the schools (as an enterprise or business in the non-commercial sense), no transfer of goodwill could be effected in favour of the 2^nd plaintiff.

21.  Mr Liao, in reply to a query from the bench, specifically stated that the 2^nd plaintiff has acquired the relevant goodwill by two routes.  First, it acquired it in 1958 by what counsel called a “succession by consent”.  In other words, the 2^nd plaintiff, with the consent of the school boards, succeeded to the schools, including the associated goodwill.  Counsel relied on Wadlow, The Law of Passing off (3^rd ed) para 3-176.

22.  Second, the running of the schools by the 2^nd plaintiff since 1958 has generated goodwill of its own in its favour.  Wadlow, idid.

23.  Counsel stressed that regardless of how goodwill had been acquired by the 2^nd plaintiff, the important point is that by the time when the matters complained of happened, the 2^nd plaintiff had acquired the relevant goodwill so as to enable it to sue the defendants in relation to those matters. 

24.  Apart from those two specific routes, Mr Liao also touched on during his oral submission some other possible ways in which the 2^nd plaintiff may have acquired the relevant goodwill.  Continuing with the previous numbering, third, Mr Liao contended that there is no authority to say that an administrator of a school in Hong Kong (or for that matter, Macau) can never acquire goodwill of its own in the name or insignia of the school by reason of the administration undertaken by it. 

25.  Fourth, goodwill could be acquired by “de facto assumption” or “adverse possession”: Wadlow, idid; Barnsley Brewery Co Ltd v RBNB [1997] FSR 462.  Counsel particularly pointed out that according to the defendants’ pleading, the original unincorporated association on the Mainland which owned the “mother school” there and founded the Hong Kong and Macau schools (i.e. the Guangdong and Guangxi Baptist Association) had become defunct and non-existent shortly after 1949 and could not possibly have been the proprietor of the Hong Kong and Macau schools anymore by the time of the transfer of administration in 1958.  In those circumstances, the 2^nd plaintiff’s de facto assumption of the control and operation of the schools could allow it to acquire goodwill in the name and insignia of the schools.  I am not sure, and Mr Liao has not made it particularly clear in his submission, whether this point was in fact the same as the second route already outlined above or was a separate point.

26.  In any event, there is, it seems to me, from the arguments of the parties, a fifth possibility: the 1969 Chinese letter (p 87 of the hearing bundle) could mean, depending on how it should be read and interpreted, a transfer of trusteeship from the authors of that letter to the 2^nd plaintiff in respect of the schools.  That could arguably, and I put it no higher than that, allow the 2^nd plaintiff to acquire the schools’ legal ownership and associated goodwill as the succeeding trustee holding the same on trust for the beneficial proprietor of the schools.  To be sure, Mr Liao did not expressly put his client’s case on that basis. 

27.  It is trite that a striking out order should only be made in a plain and obvious case.

28.  I am not convinced that the 2^nd plaintiff’s case on goodwill, particularly when understood in one or more of the above alternative ways, is wholly arguable.  It is not a plain and obvious case for striking out.

29.  However, I am firmly of the view that the 2^nd plaintiff’s present pleading is unsatisfactory in that paragraphs 5 and 7 simply fail to set out clearly the basis (or bases) upon which the 2^nd plaintiff says it has acquired the relevant goodwill.  Particulars are called for so as to inform both the court and the defendants as to the true nature of the 2^nd plaintiff’s case on its claimed goodwill.  Of course, any such basis must be consistent with its pleaded case that such goodwill is shared with the 1^st plaintiff.  Neither the court nor the defendants should be left to guess the true case of the 2^nd plaintiff.  Nor is it sufficient simply for counsel to tell the Court and the defendants what his client’s true case is by way of oral submission in an interlocutory hearing.  That is not the function of counsel, but that of pleadings.  It is no good answer to say that the defendants must have known full well what the 2^nd plaintiff’s real case is.  One of the well known functions of pleadings and particulars is to tie a party down to his pleaded case.

30.  The second point taken by Mr Neoh in support of his clients’ striking out application relates to the 2^nd plaintiff’s assertion on pleading that it has a shared goodwill with the 1^st plaintiff not only in Hong Kong and Macau but also on the Mainland. 

31.  Counsel argued that goodwill is inseparable from the business to which it adds value and exists where the business is carried on.  If such business is carried on in several places, there may be several business having a goodwill of its own.  CIR v Muller, supra, at p 235.

32.  In short, counsel argued that the 2^nd plaintiff, which has only been running the Hong Kong and Macau schools respectively, cannot possibly have acquired the relevant goodwill on the Mainland.  For those alleged tortious acts committed on the Mainland, the 2^nd plaintiff has simply sustained no loss and therefore has no cause of action.

33.  I accept Mr Liao’s answer made for the purpose of resisting the present striking out application as being sufficient for the purpose.  In short, counsel’s point is that the goodwill associated with the Hong Kong and Macau schools is just part of a larger picture.  The relevant goodwill is generated as a whole by the running of the schools in Guangdong and Guangxi, as well as those in Hong Kong and Macau.  The relevant place or location with which the goodwill is associated is the southern part of China including Hong Kong and Macau.  For the purposes of goodwill and passing off, location is defined not by political systems but by facts and circumstances.

34.  Bearing in mind that I am only dealing with a striking out application, as mentioned, I agree with Mr Liao that the 2^nd plaintiff has an arguable case in relation to the second point raised by the defendants.  It is not a plain and obvious case for striking out.

35.  In summary, in relation to the defendants’ striking out application, the order sought is refused.  However, the 2^nd plaintiff must supply particulars regarding the true nature of its case on goodwill.

Particulars

36.  As the 3^rd summons that I have to deal with relates to the defendants’ alternative application for particulars, I will deal with the particulars in one go. 

37.  Request (1) relates to paragraph 3(a) of the re-re-amended statement of claim.  That particular paragraph pleads that the 1^st plaintiff, through the members of its school board and with the assistance of its alumni, established “and/or” advised, assisted and supervised in the establishment or administration of schools in southern China, including Hong Kong and Macau.

38.  I am of the view that the particulars sought in request (1) are matters going to evidence only.  I will not allow them.

39.  However, and this goes back to what I have just said regarding necessary particulars to be supplied by the 2^nd plaintiff in order to understand fully its case on goodwill, the 2^nd plaintiff must supply particulars, in relation to each of the Hong Kong schools and Macau schools, on whether it was established by the 1^st plaintiff, or was established by others with the advice, assistance and supervision of the 1^st plaintiff.  If it is the latter, the 2^nd plaintiff must specify who established the school in question.

40.  They are important matters that the court and the defendants are entitled to know because the entity or person who established the school is prima facie entitled to the goodwill generated by running the school.  Where as here, it is alleged that there has since been a transfer of the goodwill (which, generally speaking, could only be done together with a transfer of the school business), it is most important to know who originally owned the school business and its goodwill, and from whom the 2^nd plaintiff subsequently acquired by transfer the relevant goodwill.  The same rationale applies to a case based on de facto assumption/adverse possession.

41.  Requests (2) and (3) are made under paragraph 5 of the pleading.  Again, subject to what I am going to say, I find the particulars sought going essentially to matters of evidence.  In any event, given the stage that the action has reached (discovery has been made and witness statements served) and the nature of the particulars sought, as a matter of exercising my discretion, I do not order them. 

42.  What I think is important to find out is the 2^nd plaintiff’s true case on how it has acquired the relevant goodwill – and whatever it says, its case has to be consistent with its assertion that such goodwill is shared with the 1^st plaintiff.  I have already, in the judgment above, alluded to no less than four or five possible ways that such goodwill has been, or may be said to have been, acquired by the 2^nd plaintiff.  The 2^nd plaintiff must set out in black and white which of those four or five ways, it says, was/were the one(s) by which it has acquired the relevant goodwill.  Amongst other things, the 2^nd plaintiff must specify from whom it had acquired the goodwill – thus the importance of my earlier point that under paragraph 3, the plaintiff must specify who established the Hong Kong schools and Macau schools in the first place.  Of course, if the 2^nd plaintiff should say, as the defendants do, that the Guangdong and Guangxi Baptist Association was the founder of the schools and it has become defunct by 1958, and it acquired the relevant goodwill by means of de facto assumption/adverse possession, that has to be set out clearly and specifically in the particulars.

43.  I do not intend to formulate the request.  It is not for the Court, nor the defendants, to tell the 2^nd plaintiff how to plead its case properly.  What I will do is to order the 2^nd plaintiff to file a statement of the nature of its case on its acquisition of the relevant goodwill on which it relies (Order 18, rule 12(3), Rules of the High Court, Cap 4).  Such a statement would be made under paragraphs 5 and 7 of the 2^nd plaintiff’s pleading. 

44.  I consider the supply of such a statement essential to a proper understanding of the true case of the 2^nd plaintiff relating to its alleged acquisition of the relevant goodwill on a shared basis with the 1^st plaintiff, as well as to tying the 2^nd plaintiff down to its pleaded case.

45.  Request (4) is made under paragraph 13(c).  It relates to the 1^st and 2^nd defendants’ causing the transfer of the proprietorship of Pui Ching Commercial College to the 1^st defendant subsequent to its incorporation in June 2000.

46.  I do not allow the request.  It goes to matters of evidence, which are in fact well within the knowledge of the defendants.  The supply of the requested particulars would not serve any real purpose.  In the exercise of my discretion, I do not allow the request.

Outcome

47.  In summary, in relation to the defendants’ striking out summons dated 12 July 2006, I make no substantive order save that the 2^nd defendant do file and serve the particulars and statement of the nature of the case on which it relies described above within 14 days from the date this judgment is handed down.  The 2^nd plaintiff’s cross summons dated 17 July 2006 is dismissed.  Finally, subject to what I have just said, I make no substantive order on the defendants’ summons dated 12 May 2006 for particulars.

48.  Regarding costs, I make the following costs orders nisi.  As regards the defendants’ striking out summons, the defendants are not successful in obtaining a striking out order, but the 2^nd plaintiff’s pleading does call for the supply of essential particulars.  On balance, I order that the costs of the summons be the relevant defendants’ costs in the cause, to be taxed if not agreed.  As regards the 2^nd plaintiff’s cross summons, I order that the costs of the summons be paid by the 2^nd plaintiff to the relevant defendants in any event, to be taxed if not agreed.  In respect of the defendants’ summons for particulars, I make no order as to costs.

49.  Unless an application is made within 14 days after this judgment is handed down to vary the relevant costs order nisi, the same shall become absolute upon the expiry of the 14 days period.

50.  I thank counsel for their assistance.