DAIMLER AG (FORMERLY MERCEDES BENZ AG) v. LEIDUCK, HERBERT HEINZ HORST AND ANOTHER

CACV 172 /2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 172 OF 2011

(ON APPEAL FROM HCA NO. 4089 OF 1994)

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REASONS FOR JUDGMENT

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Hon Fok JA (giving the Reasons for Judgment of the Court):

INTRODUCTION

1. By her Decision dated 28 July 2011, Deputy High Court Judge Au-Yeung dismissed an application by the plaintiff for relief against sanctions flowing from the breach of an unless order for the provision of answers to certain interrogatories.  This had the consequence that an inquiry as to damages suffered by the defendants as a result of the issue of a Mareva injunction was directed to proceed and the plaintiff’s pleading contesting the defendants’ entitlement to claim such damages remained struck out.

2. This was the plaintiff’s appeal against that Decision.  At the conclusion of the hearing, we allowed the appeal but subject to an order that the plaintiff provide further answers to certain of the interrogatories.

3. We indicated that we would hand down the reasons for our judgment in due course and these are the reasons.

THE FACTS

The Mareva injunction and its subsequent discharge

4. This action has a long history, having been commenced in April 1994, when the plaintiff obtained a Mareva injunction against the defendants.  The plaintiff alleged that the 1^st defendant had misappropriated US$20 million advanced by the plaintiff under a contract for the sale and purchase of cars. As against the 2^nd defendant, it was alleged that US$6 million of the US$20 million had been used to discharge a loan due from the 2^nd defendant to Banque Nagelmackers 1747 Luxembourg.

5. The application for the injunction was supported by an affidavit of Mr Paul Carolan, then a partner of the firm of solicitors acting for the plaintiff.  The material part of Mr Carolan’s affidavit, so far as the claim against the 2^nd defendant is concerned, stated:

“13. The first defendant is at present detained by the authorities in Monaco to answer several charges of fraud and misappropriation of funds, having been detained at about the beginning of October 1992. The plaintiff has also filed a penal suit against the first defendant in Monaco. There are a number of creditors who are investigating the first defendant’s assets and attaching them wherever they find them. The Investigating Magistrate in Monaco, M Lefort, has seized files relating to the bank accounts of IRSAM and the first defendant. The plaintiff’s Paris lawyer, Maître Georges Fridmanis, met with Investigating Magistrate on 5 April 1994 who believes that he has found evidence of the following movements of money. After filing its penal suit in Monaco, Maître Fridmanis was given access to the Investigating Magistrates files on 22 and 26 April 1994.

14. When the US$20m was credited to the account of IRSAM with Banque Nagelmackers 1747 Luxembourg, the first defendant

(1) used US$5m to secure the guarantee referred to in paragraph 8 above.

(2) US$6m has been used by Banque Nagelmackers [1747] Luxembourg to clear a loan of the same amount granted jointly to the second defendant and Vernal Establishment under a loan agreement dated 30 July 1991 signed by the first defendant. An original of this document was registered in Monaco on 5 December 1991 at vol 161, recto (right-hand page), case 2, in connection with a document dated 28 November 1991 securing a mortgage. A copy of the first page of the statement of registration of the mortgage (Borderau d’Inscription déposé pour la conservation des hypothèques de Monaco) is now produced and shown to me marked ‘PJC-10’. The reference to the loan agreement is to be found under the paragraph headed ‘en vertu I’. A copy of the mortgage register (conservation des hypothèques) is now produced and shown to me marked ‘PJC-11’. Under volume 176 no 147 there is a reference to the mortgage (hypothèque conventionelle) and to the loan agreement dated 28 November 1991. This loan has been extended twice, once to 31 December 1992 and again to 31 December 1993 as is shown in the bottom right-hand corner of page I and II of the mortgage register ‘MENTION DU 02/12/1992:’ and at the end of the mortgage register ‘MENTION DU 27/10/1993’ and the corresponding handwritten entries in the statement of registration of the mortgage. Thus it seems that the loan was not yet due in July 1993 when the repayment was made.

…”

(Underlining added)

6. The injunction was duly granted on 29 April 1994 and contained the usual undertaking as to damages given on behalf of the plaintiff.

7. It transpired, however, that the 2^nd defendant’s loan had not in fact been repaid as alleged.  The plaintiff was so informed and, by a consent order dated 17 May 1994, it agreed to the discharge of the injunction against the 2^nd defendant and to pay the costs of the 2^nd defendant on an indemnity basis.  In the inter-solicitor correspondence recording the agreement to discharge the injunction, it was recorded that the plaintiff’s agreement to the terms of the consent order was:

“… based upon your client’s confirmation that it will make no claim for damages pursuant to our client’s undertaking.”

8. The Mareva injunction against the 1^st defendant was also subsequently discharged by the court on other grounds.  Separate legal proceedings were pursued by the plaintiff against the 1^st defendant in Monaco.

The defendants’ application for an inquiry as to damages

9. It is now the defendants’ case that, as a result of the Mareva injunction, the 2^nd defendant collapsed as a going concern and that the agreement not to claim damages under the plaintiff’s undertaking was procured by fraud.  The defendants have therefore applied, by summons dated 23 July 2007 (“the Inquiry Summons”), for an inquiry as to damages under that undertaking.  Since there is a clear agreement not to claim such damages, a critical issue in the summons seeking the inquiry as to damages is whether that agreement is vitiated by fraud as alleged by the defendants. Pleadings and evidence by way of affirmation have been filed in respect of that issue.

10. In the Points of Claim re Fraud, the defendants pleaded that the Investigating Magistrate in Monaco, M. Lefort, had procured a bribe in the form of a new Mercedes-Benz car in return for providing the false information relied upon by the plaintiff in support of the Mareva injunction.  This was referred to by the Deputy Judge below as “the Lefort fraud”.

11. But this fraud was not originally the basis on which it was pleaded that the agreement not to claim damages was vitiated by fraud.  As to that, the defendants pleaded that Mr Philip Yip Tai Yick, a shareholder of the 2^nd defendant, was induced to agree to the consent order including the term not to claim damages under the plaintiff’s undertaking by promises of future business dealings with the plaintiff, namely an order from the plaintiff through a company controlled by Mr Yip for the manufacture of rear axles in Shenyang to be used in Mercedes-Benz trucks.  This was referred to by the Deputy Judge below as “the Yip fraud”.

12. In an affirmation in the Inquiry Summons, Mr Rene von Samson-Himmelstjerna, a senior legal counsel of the plaintiff, stated:

“17. I also note that the Mareva against [the 2^nd defendant] was based on the findings of an investigating magistrate in Monaco, Monsieur Jacques Lefort (‘Lefort’), that US$6 million (out of the US$20 million advanced under the IRSAM Agreement) was used by Banque Nagelmackers [1747] Luxembourg to settle a loan of the same amount granted to [the 2^nd defendant] and another party. Such findings were later found to have been misunderstood by the Plaintiff’s solicitors in Paris, who conveyed the same to the Plaintiff’s solicitors in Hong Kong. …”

(Underlining added)

The interrogatories administered by the defendants

13. On 29 January 2010, the defendants requested the plaintiff to answer in writing by affirmation the following interrogatories in respect of paragraph 17 of Mr von Samson-Himmelstjerna’s affirmation (quoted above):

“(a) State the exact wording that was used by Lefort in conveying his findings of the usage of US$6 million (out of the US$20 million advanced under the IRSAM Agreement) to the Plaintiff’s solicitors in Paris;

(b) Identify the documents that were used or referred to by Lefort in conveying his findings of the usage of US$6 million (out of the US$20 million advanced under the IRSAM Agreement) to the Plaintiff’s solicitors in Paris;

(c) State the understanding of the Plaintiff’s solicitors in Paris of such wording used by Lefort;

(d) State why and how such findings were misunderstood by the Plaintiff’s solicitors in Paris;

(e) State the exact wording that was used by the Plaintiff’s solicitors in Paris when conveying such findings to the Plaintiff’s solicitors in Hong Kong; and

(f)  State how the Plaintiff later found out about such misunderstanding.”

14. The plaintiff applied by summons dated 12 February 2010 for an order that the interrogatories be withdrawn and that application was heard on 11 March 2010 by Master Lung.  At the hearing, the defendants applied to amend their Points of Claim re Fraud in the Inquiry Summons to plead the Lefort fraud as another basis on which the agreement not to claim damages was vitiated by fraud.  The plea was that, by not disclosing the circumstances of the Lefort fraud, the plaintiff fraudulently misrepresented that the Mareva injunction had been obtained against the 2^nd defendant by a bona fide mistake on the part of the plaintiff.

15. Master Lung dismissed the application to amend the Points of Claim and ordered the withdrawal of the interrogatories.  On 8 April 2010, Deputy Judge L. Chan upheld the Master’s decision on appeal.

16. On 14 September 2010, the Court of Appeal[1] granted the defendants leave to appeal.  Subsequently, by an order made by consent on 9 November 2010, the appeal was allowed, the plaintiff was ordered to provide answers to the interrogatories within 28 days and the defendants were given leave to amend the Points of Claim re Fraud.

The Unless Order

17. Under the consent order of 9 November 2010, the interrogatories should have been answered by 7 December 2010.  By summons dated 6 December 2010, the plaintiff sought an extension of 21 days in order to answer the interrogatories.  This would have meant the interrogatories should have been answered by 28 December 2010.

18. By an order dated 7 December 2010, Master Ko ordered that unless the plaintiff were to answer the interrogatories by 4 pm on 4 January 2011, the plaintiff’s Points of Defence re Fraud be struck out and there be an inquiry as to damages sought by the defendants (“the Unless Order”).

The Answers to the Interrogatories and the subsequent applications

19. On 22 December 2010, Mr von Samson-Himmelstjerna swore an affirmation providing the following answers to the interrogatories:

“(a) The content of the communication between the Plaintiff’s solicitors in Paris and Lefort is protected by legal professional privilege.

(b) The content of the communication between the Plaintiff’s solicitors in Paris and Lefort is protected by legal professional privilege.

(c) The Plaintiff’s understanding is tied to the content of the communication between the Plaintiff’s solicitors in Paris and Lefort, which is protected by legal professional privilege.

(d) There was no misunderstanding by the Plaintiff’s solicitors in Paris of Lefort’s findings. The Request appears to stem from a fundamental misapprehension by the Defendants of my earlier evidence. When I deposed in My First Affirmation (at §17) that ‘such findings were later found to have been misunderstood by the Plaintiff’s solicitors in Paris, who conveyed the same to the Plaintiff’s solicitors in Hong Kong’, I meant that the Plaintiff’s solicitors in Paris later discovered that Lefort’s findings were mistaken and conveyed their discovery of the mistaken findings to the Plaintiff’s solicitors in Hong Kong. I did not mean (and it was not the case) that the Plaintiff’s solicitors in Paris had independently misunderstood the matters that were the subject of Lefort’s findings.

(e) The findings of Lefort were conveyed to the Plaintiff’s solicitors in Hong Kong by the Plaintiff and not by the Plaintiff’s solicitors in Paris. Beyond this, the content of the relevant communication between the Plaintiff and the Plaintiff’s solicitors in Hong Kong is protected by legal professional privilege.

(f)  As stated above at (d), there was no relevant misunderstanding on the part of the Plaintiff’s solicitors in Paris. Accordingly, there was no misunderstanding by the Plaintiff’s solicitors in Paris for the Plaintiff to learn of.”

20. Although made before the relevant deadline, the affirmation was not filed until about 4.30 pm on 4 January 2011 and not served on the defendants’ solicitors until about 5.47 pm that day.

21. On 25 January 2011, the plaintiff issued a summons seeking an extension of time for the plaintiff to file and serve the answers to the interrogatories notwithstanding that they had not been filed and served within the time limit prescribed by Master Ko’s order of 7 December 2010.  This summons was supported by an affirmation of an associate in the firm of solicitors acting for the plaintiff, in which he took all the blame for the failure to serve the answers within time.

22. For their part, the defendants issued a summons on 27 January 2011, seeking orders, for the avoidance of doubt, that the plaintiff’s Points of Defence re Fraud be struck out and that there be an inquiry as to damages as sought by the Inquiry Summons.  The defendants’ summons also sought consequential directions in relation to that inquiry.

23. The hearing before the Deputy Judge below commenced on 3 May 2011 but was adjourned part-heard to 14 June 2011.  On 9 May 2011, between the hearings, the plaintiff issued a further summons to seek an extension of time in which to make its application for relief from the sanction flowing from the failure to comply with the Unless Order.[2]

THE JUDGMENT BELOW

24. In addition to the issue of the timing of the filing of the answers, the adequacy of those answers and the plaintiff’s entitlement to rely on legal professional privilege (“LPP”) were matters in dispute.  In her Decision, the Deputy Judge identified the issues before her as being broadly:

(1)  whether the plaintiff had a good explanation for the delay;

(2)  having consented to provide the answers to the interrogatories, whether the plaintiff was entitled to rely on LPP in its answers; and

(3)  whether the plaintiff should be granted relief from sanction.

25. The Deputy Judge considered the evidence filed on behalf of the plaintiff and considered that the circumstances spoke of negligence, incompetence or sheer indolence on the part of the plaintiff’s solicitors.  However, she did not consider that this should be laid at the door of the plaintiff. She concluded, on this issue:

“28. Late as it was, leave ought to be given for the filing of the Plaintiff’s Summons out of time. I accept that the delay giving rise to breach of the Unless Order and failure to file the Plaintiff’s Summons in time was caused by T and not the Plaintiff.”[3]

26. On the issue of whether the plaintiff was entitled to rely on LPP in its answers, the Deputy Judge considered two separate questions: (i) whether LPP could be engaged; and (ii) whether, if LPP were engaged, the plaintiff had waived it.

27. The Deputy Judge considered that LPP was not proved to be engaged “at least in respect of interrogatory (b)”.[4]

28. As to waiver of the right to rely on LPP, the Deputy Judge accepted there was no express waiver but held that there was deemed waiver for three broad reasons, namely: (i) deployment of the contents of the alleged privileged materials; (ii) inconsistent evidence of the plaintiff showing a shift in stance; and (iii) submission to the consent order of the Court of Appeal.  The Deputy Judge held that the consequence was that:

“… the Answers are so insufficient as to amount to no answers at all.”[5]

29. The Deputy Judge then considered the factors under RHC O.2 r.5(1) in order to determine whether the plaintiff should be granted relief from the sanction of the Unless Order.  She declined to grant relief, concluding:

“68. Although the delay was explained, the Answers were grossly insufficient. LPP was not available to interrogatory (b) and there was deemed waiver of LPP in respect of the Interrogatories. The Plaintiff should not be permitted to make selective disclosure. The Answers were also evasive and against the spirit of the judgment of Rogers JA and the Consent Order. I therefore dismiss the Plaintiff’s Summons.”

She therefore dismissed the plaintiff’s summons dated 25 January 2011 (for which, as noted above, she was prepared to extend time) and made an order in terms of that of the defendants dated 27 January 2011.

THE ISSUES ON APPEAL

Whether Judge’s exercise of discretion vitiated by any error of law

30. As Mr Horace Wong SC, leading counsel for the defendants, rightly pointed out, it is trite law that on an appeal against the exercise of a discretion, the issue is whether the Deputy Judge was plainly wrong in her decision or whether she has taken irrelevant matters into consideration in her decision or has ignored relevant matters which entitles this Court to intervene: SMM v TWM (Child: Relocation) [2010] 4 HKLRD 37 at §30.

31. As I have already noted, in the present case, the Deputy Judge held that all the answers to the interrogatories were so insufficient as to amount to no answers at all.

32. In respect of the answers to interrogatories (d) and (f), where there is no claim to LPP, the Deputy Judge took the view that those answers were so contradictory as to amount to no answers at all (Decision §49).  Her view that the answers were contradictory is based on her reading paragraph 17 of Mr von Samson-Himmelstjerna’s affirmation in the Inquiry Summons (see above) as stating that the relevant fault leading to the application for the Mareva injunction against the 2^nd defendant was that of the plaintiff’s solicitors in Paris.  As answers (d) and (f) show, however, Mr von Samson-Himmelstjerna maintains that the misunderstanding was on the part of M. Lefort and not the plaintiff’s solcitiors in Paris and hence those interrogatories are based on a false premise.

33. The relevant sentence in paragraph 17 of Mr von Samson- Himmelstjerna’s affirmation is, in our opinion, ambiguous.  The ambiguity arises from whether the words “by the Plaintiff’s solicitors in Paris” relate to and qualify the words “were later found” or “to have been misunderstood”.  The Deputy Judge considered they qualified the latter, whereas Mr von Samson-Himmelstjerna maintains they qualified the former.  Thus, according to Mr von Samson-Himmelstjerna (in the answers to the interrogatories), the misunderstanding was that of M. Lefort and not the plaintiff’s solicitors in Paris.  And so, according to Mr von Samson-Himmelstjerna, it was M. Lefort’s mistaken understanding (“the same”) that was conveyed by the plaintiff’s solicitors in Paris to the plaintiff’s solicitors in Hong Kong.

34. We do not think that the ambiguity can be resolved on a mere reading of Mr von Samson-Himmelstjerna’s affirmation.  The grammar and syntax in the sentence in question are capable of giving rise to a genuine ambiguity.  Mr von Samson-Himmelstjerna has given his explanation of paragraph 17 of his affirmation in answers (d) and (f).  The defendants are entitled to challenge his explanation there.  However, unless and until that explanation is rejected, and there is no basis for doing so at this interlocutory stage prior to cross-examination of Mr von Samson-Himmelstjerna or trial, we do not accept that it can be said that the answers to interrogatories (d) and (f) are so contradictory as to amount to no answers at all and we would respectfully disagree with the Deputy Judge’s conclusion to this effect.

35. Turning to the answers to interrogatories (a), (b), (c) and (e), Mr John Yan SC, leading counsel for the plaintiff, submitted that these answers could not be said to be “no answers at all” because it is proper for a party to invoke LPP in answer to interrogatories.  He relied in this respect on the provisions of O.26 r.5(1) which provides that:

“… where a person objects to answering any interrogatory on the ground of privilege he may take the objection in his answer.”

36. Mr Yan also relied on Reuben Import Export Company Limited v Wong Cheong Fung Company [1957] HKLR 81 where Gould J endorsed (at p. 85) the principle that where objection is to be taken to an interrogatory on the ground of privilege (in that case the privilege against self-incrimination) the objection must be on oath and is properly taken in the answer to the interrogatory.  Gould J rejected the defendant’s argument in that case that, the plaintiff having consented to answer the interrogatories, he should not be considered to have complied with the consent order unless he gave an answer going to the substance of the interrogatory (see p. 87).

37. For similar statements as to the entitlement to claim the privilege against self-incrimination by way of answer to interrogatories, see also: Mirror Group Newspapers plc v Maxwell & Ors [1992] BCC 218 at 219F; A.T. & T. Istel Ltd & Anor v Tully & Anor [1993] AC 45 at p. 68C-E. If an issue arises as to the entitlement to claim the privilege, that will then be ruled upon: see Guinness plc v Saunders & Ors, unrep., 17.10.88 per Staughton LJ.  That is consistent with the procedure in O.26 r.5(2) which provides that:

“Where any person on whom ordered interrogatories have been served answers any of them insufficiently, the Court may make an order requiring him to make a further answer, either by affidavit or an oral examination as the Court may direct.”

38. For the defendants, Mr Wong challenged these submissions of Mr Yan root and branch.  So far as the cases relied upon by Mr Yan were concerned, Mr Wong sought to distinguish them on the basis that they were concerned with the privilege against self-incrimination and submitted that the ratio of those cases were limited to self-incrimination and did not apply in respect of LPP.  Mr Wong contended that the proper course for a party seeking to raise LPP as an objection to answering an interrogatory is to apply for the withdrawal of the interrogatory under O.26 r.3(2) and not to require the administering party to seek a further order under O.26 r.5(2).  Mr Wong also submitted that Reuben was further distinguishable on the basis that it was decided at a time when interrogatories could only be administered with leave and before the current O.26 r.5 was enacted (in 1991).

39. Mr Wong pointed to the history of the matter from the time the interrogatories were served which showed, he submitted, that the plaintiff had contested the interrogatories vigorously over a period of seven months before Master Lung, Deputy Judge L. Chan and the Court of Appeal, before finally agreeing to the consent order to answer the interrogatories.  He sought to support the Deputy Judge’s conclusion that the plaintiff had waived the right to rely on LPP by consenting to the order to answer the interrogatories, which she expressed thus:

“53. Clearly the Plaintiff owed a duty to the Court to make full and frank disclosure as to why mistakes had been made causing a discharge of the Mareva injunction. The Answers go nowhere near the discharge of this duty and were nothing short of being evasive. They are against the spirit of the judgment of Hon. Rogers VP and the Consent Order.”

40. The reference to the spirit of the judgment of Rogers VP is a reference to the part of his judgment granting the defendants leave to appeal against the order for the withdrawal of the interrogatories where he appears to have regarded Mr von Samson-Himmelstjerna’s evidence as being contradictory.  Whilst we would fully endorse Rogers VP’s observation that the plaintiff owed a duty to give a full and frank explanation of the circumstances leading to the discharge of the Mareva injunction, with respect, we are not prepared, at this interlocutory stage, to take the same view as to the effect of Mr von Samson-Himmelstjerna’s evidence (for the reasons set out above).

41. We would add that, for our part, we would not have held that the plaintiff’s consent to answer the interrogatories amounted to a waiver of its right to rely on LPP in response.[6]  A waiver must be clear and unequivocal and, in our view, no such clear and unequivocal representation arises from the consent to answer the interrogatories or the circumstances leading to that consent.  The period from the administration of the interrogatories by the defendants until the consent order was a period in which the plaintiff was taking legitimate steps, sanctioned by the rules, to challenge those interrogatories and we do not agree with Mr Wong’s characterisation of these steps as the playing of games by the plaintiff.

42. Furthermore, we do not accept Mr Wong’s submission that the cases relied upon by Mr Yan are distinguishable on the basis that they are concerned with the privilege against self-incrimination.  The entitlement in O.26 r.5(1) to take objection on the ground of privilege is general and there is no authority that limits that entitlement to the privilege against self-incrimination rather than some other form of privilege, such as LPP.  On the contrary, there is authority to support the proposition that the objection to disclose communications protected by LPP extends to answers to interrogatories as well as the discovery of documents: see Kennedy v Lyell (1883) 23 Ch. D. 387 cited in Hong Kong Civil Procedure 2012 (Vol. 1) at para. 26/5/2 (p. 613).

43. We recognise that the defendants and their solicitors may have felt frustrated by, and been suspicious of, the manner in which the plaintiff had contested their entitlement to the interrogatories and then, having consented to provide the answers, sought to invoke LPP.  The plaintiff could have done so at the outset instead of contesting the interrogatories.  However, the existence of LPP in relation to a particular communication is a matter of judgment on which a bona fide difference of opinion can exist.  There is no basis for holding that the claim to LPP here was advanced in bad faith or that the plaintiff did not genuinely believe that it was entitled to answer the interrogatories in this way.  Moreover, the structure of O.26 entitles a party to apply for the withdrawal of interrogatories before answering them and, if he is eventually required to do so, he is entitled to invoke LPP (although he may yet be required to provide further answers if the claim to privilege is subsequently held to be invalid).

44. One may test the matter by asking whether, had the answers to the interrogatories been filed within time under the Unless Order, the automatic sanction would have taken effect.  Mr Wong submitted that it would have.  On the facts of this case, we do not agree.  Two of the six answers were sufficient.  The claim to LPP in respect of the other four could not be determined to be inadequate without some further analysis.  Indeed, that would appear to be the reason why the defendants issued their summons dated 27 January 2011 seeking, “for the avoidance of doubt”, an order that the plaintiff’s Points of Defence re Fraud be struck out for failing to file the answers in time.  The summons itself recognised the element of doubt.

45. For these reasons, therefore, and with respect to the Deputy Judge, we would hold that she was in error in holding that answers to interrogatories (a), (b), (c) and (e), in claiming LPP, were “no answers at all”.

46. It therefore follows that, in our opinion, the Deputy Judge’s exercise of discretion was vitiated by her view, with which we respectfully differ, that the answers to the interrogatories were no answers at all.  This conclusion therefore entitles this Court to exercise a fresh discretion whether or not to grant relief from sanction and, if so, on what terms.

Fresh exercise of discretion: whether proper application for relief from sanction

47. Mr Wong submitted, in reliance on Marcan Shipping (London) Limited v Kefalas & Anor [2007] EWCA Civ 463, unrep., 17.5.07 at §§28 to 36, that, under the new procedural regime, it is not for the party seeking to take advantage of a default to apply to the court in order to render a sanction for that default effective.  Instead, the sanction takes effect immediately and it is for the party in default to apply for relief from the sanction.  Only if there is an application for relief from the sanction is the court required to consider whether, in all the circumstances, it is just to make an order granting relief from the consequences that would otherwise follow.

48. We would accept those submissions as an accurate summary of the effect of O.2 r.4 and O.2 r.5.

49. It is apparent that, before the Deputy Judge, the plaintiff took the position that the only relief it required was an extension of time in order to comply with the Unless Order.  Thus, its summons dated 25 January 2011 only seeks an extension of time to the plaintiff to file and serve the answers to the interrogatories notwithstanding that they had not been filed and served within the time limit prescribed.

50. This summons can be criticised in two respects.  First, as the Deputy Judge pointed out (Decision §21), the plaintiff had overlooked the requirement in O.2 r.4 to apply for relief from sanction within 14 days of the failure to comply with the relevant court order leading to the sanction.  Secondly, the summons was drafted as if the automatic sanction under the Unless Order had not in fact taken effect whereas the position was that, upon the plaintiff failing to file and serve the answers to the interrogatories by 4 pm on 4 January 2011, the plaintiff’s Points of Defence re Fraud stood struck out.  It therefore follows that the summons should, in addition to the extension of time to comply with the Unless Order, have sought an order for the reinstatement of the Points of Defence re Fraud.  That is the relief that the plaintiff required to obtain from the court.

51. The plaintiff’s later summons dated 9 May 2011 cured the first flaw but did not address the second.  The omission to claim the reinstatement of the Points of Defence re Fraud is also carried over to the plaintiff’s notice of appeal, which simply seeks an order in terms of the plaintiff’s summons of 25 January 2011.

52. However, in our judgment, although the plaintiff’s summons (and notice of appeal) could have been better worded, it is tolerably clear that the substance of the plaintiff’s application is to permit the plaintiff to continue to contest the allegation of fraud as the basis on which the defendants seek to prevent the plaintiff from relying on the clear and express agreement not to claim damages for breach of the undertaking.

53. Ultimately, in our view, the shortcomings in the plaintiff’s drafting go to the issue of costs, which is addressed below.

Fresh exercise of discretion: LPP was not engaged

54. It is relevant to consider this question since, notwithstanding our conclusion that the Deputy Judge was wrong to hold that the answers were no answers at all, it would be relevant to the exercise of the discretion whether to grant relief from the sanction of the Unless Order to consider whether the answers proffered in response to the interrogatories were sufficient answers.  This is because, if it were determined they were not sufficient, any relief would almost certainly be conditional upon compliance with an order to provide further answers.

55. The Deputy Judge thought that LPP was not proved to be engaged at least in respect of interrogatory (b).  We would go further and hold that LPP was not engaged in respect of any of interrogatories (a), (b), (c) or (e).  On the basis of Mr von Samson-Himmelstjerna’s evidence that the misunderstanding was that of M. Lefort and not the plaintiff’s solicitors in Paris, the exact wording of the conveyance of M. Lefort’s findings to the plaintiff’s solicitors in Paris would not involve the disclosure of materials subject to LPP but instead would simply constitute matters of fact provided to the plaintiff’s solicitors in Paris.  Similarly, the documents used or referred to by M. Lefort in conveying his findings were purely factual, as is the understanding of his findings by the plaintiff’s solicitors in Paris and the wording used by them (who, on Mr von Samson-Himmelstjerna’s evidence, simply passed on those findings to the plaintiff’s solicitors in Hong Kong) to convey those findings to the plaintiff’s Hong Kong solicitors.

56. Since, in our view, LPP was not engaged for any of interrogatories (a), (b), (c) or (e), it was not necessary for the Deputy Judge to resolve the question of whether there was a waiver of LPP by the plaintiff.[7]  However, the consequence of determining that LPP is not engaged is that a relevant consideration in the weighing exercise under O.2 r.5 (which enjoins the court to consider “all the circumstances” including the matters listed in (a) to (j)) is the fact that those answers are insufficient and susceptible to an order under O.26 r.5(2) for the provision of further answers.

Fresh discretion: relief from sanction be granted taking into account all relevant circumstances

57. In our view, a weighty factor in the weighing exercise to be undertaken by the court on a fresh exercise of the discretion is the question of proportionality of the sanction in the circumstances of this case.

58. The starting point is that there was a clear and express agreement between the parties that the 2^nd defendant would not claim damages under the plaintiff’s undertaking.  That agreement is now said to be vitiated by fraud but that allegation was not raised until 2007, some 13 years after the discharge of the Mareva injunction in 1994.  An allegation of fraud is one which, pre-eminently, should be the subject of a trial: cf. the bar on summary judgment proceedings in an action which includes a claim by a plaintiff based on an allegation of fraud (O.14 r.1(2)(b)).  The effect of the sanction (and, by way of corollary, the effect of the refusal to grant relief: O.2 r.5(1)(j)[8]) is to debar the plaintiff from contesting the allegation of fraud against it: in effect, the plaintiff stands convicted of the Lefort fraud and the Yip fraud without any trial.  It is not in the interests of the administration of justice that serious findings go by way of default against a party, especially since, pursuant to O.1 r.2(2), the court is enjoined to recognise that the primary aim in exercising its powers is to secure the just resolution of disputes in accordance with the substantive rights of the parties (O.2 r.5(1)(a)[9]).

59. In the present case, the answers to the interrogatories were filed and served out of time by a matter of hours on the day they were required to be filed.  Two of the answers are simply late and, in respect of the lateness (O.2 r.5(1)(b)[10] and (d)[11]), the Deputy Judge was prepared to accept the plaintiff had a good explanation for the delay and to extend time.  The other four answers, invoking a claim to LPP which we consider was not engaged, were susceptible to a further order under O.26 r.5(2).  That is to say, the breach of the Unless Order to that extent was not incurable.  Furthermore, despite Mr Wong’s submission that the plaintiff took a calculating, deliberate and conscious stance of maintaining that the answers were adequate, so that this was an intentional failure to comply, we do not agree.  There is no basis for assuming that the claim to LPP was advanced in bad faith (and Mr Wong did not advance this submission) or that the plaintiff did not genuinely believe that it was entitled to answer the interrogatories in this way (O.2 r.5(1)(c)[12]).  This was not a case of intentional and contumelious disregard of a court’s peremptory order: the need for relief from sanction only arose because of the strike out sanction built into the Unless Order.  The invocation of LPP being a matter of legal judgment, it is very unlikely that the decision to invoke this privilege in the answer to the interrogatories was otherwise than one taken upon the advice of its solicitors (O.2 r.5(1)(f)[13]).

60. Prior to the breach of the Unless Order, the plaintiff had been pursuing its right under the rules to challenge the defendants’ entitlement to administer the interrogatories and the only breaches of the rules of court by the plaintiff relate to the provision of the answers to the interrogatories pursuant to the Unless Order (O.2 r.5(1)(e)[14]).

61. No trial date had been fixed for the trial of the fraud issue in the Inquiry Summons (O.2 r.5(1)(h)[15]).  We were told that the assessment of damages under the Inquiry Summons has been fixed for February 2013, so final preparation for that hearing is still some way off.  It would seem reasonable to aspire to using the February 2013 hearing for the trial of the fraud issue and the parties should be encouraged to arrive at a procedural timetable that might achieve that end.

62. As against the injustice to the plaintiff if relief is not granted, the consequence to the defendants of an exercise of discretion in favour of the plaintiff (O.2 r.5(j)) is that they are deprived of what may be described as a windfall advantage – i.e. the setting aside, without a trial, of the agreement not to claim damages under the undertaking on the basis of fraud– that has accrued to them by reason of the grant of the Unless Order and its breach.

63. Although Mr Wong submitted, relying on Marcan (supra) at §42, that a respondent to an application for relief from sanction should be given the opportunity to file evidence in response and suggested that there was relevant evidence concerning the poor state of health of the 1^st defendant, we do not consider that evidence of that nature (which the defendants could, in any event, have filed before the hearing before the Deputy Judge) could change the fact that the prejudice to the defendants from the grant of relief from sanction in this case would simply be the loss of the windfall advantage of not having to prove its claim in fraud in the orthodox manner at trial by evidence.

64. Mr Wong further submitted, relying on Marcan (supra) at §34, that it must be assumed that at the time of making the Unless Order the Master considered all the relevant factors and reached the decision that the sanction should take effect in the event of default.  However, it is by no means clear that, at the time the Unless Order was made, thought was given to the question of default otherwise than in respect of the timing of the filing of the answers.  After all, the Unless Order was the result of the plaintiff’s application for an extension of time to file the answers.  And the question of the consequence of failure to comply was plainly not without doubt, as evidenced by the defendants’ “for the avoidance of doubt” summons.

65. It is true that the effect of the failure to comply with the Unless Order on the defendants is that there has been delay since the 4 January 2011 and the defendants have had to argue, successfully, that four of the answers to the interrogatories are insufficient (O.2 r.5(1)(i)[16]).  On the other hand, the delay can be compensated in costs and the insufficiency of the four answers in question can be addressed by this court requiring the plaintiff to provide further answers to those interrogatories without the invocation of LPP.  Mr Wong acknowledged that the court had jurisdiction to adopt this course, although he urged the court not to exercise its discretion in this manner: indeed he submitted, in reliance on Marcan at §§30 and 34, that the court should only act on its own initiative to grant relief in an exceptional case.

66. However, the use of this alternative is, in our opinion, in keeping with the spirit of CJR under which the court will generally use striking out as a remedy of last resort and is encouraged to consider other measures that may be more appropriate to be taken: see Wing Fai Construction Co Ltd (in liq) v Yip Kwong Robert [2012] 1 HKLRD 589 at §§33 and 75(1).  Mr Wong rightly noted that Wing Fai Construction is a case involving the court considering whether to impose a strike out sanction, whereas in the present case the striking out has already taken effect.  We recognise the distinction between these two situations but we consider that the observations of the Chief Justice are of application in circumstances such as the present.  If the plaintiff is ordered to provide further answers subject to the sanction of striking out under the Unless Order, we consider that this will provide some mitigation of the effect on the defendants of the plaintiff’s failure to comply in the first place.

67. For the above reasons, it follows that we would exercise the discretion afresh and grant the plaintiff relief from the sanction of the Unless Order subject to terms.

Conclusion: relief from sanction but on terms

68. The above reasons are the reasons we concluded that we should exercise the fresh discretion to grant the plaintiff relief from the sanction consequent on its failure to comply with the Unless Order but conditional upon the plaintiff providing further answers, without the invocation of LPP, to interrogatories (a), (b), (c) and (e). 

69. We therefore allowed the appeal and set aside the order of the Deputy Judge dated 28 July 2011, save for paragraph 1.

70. We considered that the appropriate form of further order would be to extend the time for the plaintiff to comply with the Unless Order to a particular date after our judgment so that the sanction under the Unless Order remained an operative inducement on the plaintiff to ensure its compliance with the order to provide further answers.

71. Mr Yan indicated that the plaintiff would require 14 days to provide the further answers because Mr von Samson-Himmelstjerna was in China.  Hence, we extended time for compliance with the Unless Order for a period of 14 days from the date of our judgment.  Upon the provision of the further answers, but not before, the Points of Defence re Fraud will be reinstated.

72. The plaintiff had applied by way of summons dated 17 April 2012 for leave to adduce further evidence in support of the appeal.  Since we were satisfied that the appeal should be allowed without reference to the further evidence in question, we did not consider it necessary to determine that application and so made no order on the plaintiff’s summons.

73. In order to enable dates presently fixed in February 2013 for the assessment of damages to be used as dates for trial of the fraud issue, we make the following directions:

(1)  The action be listed before a judge of Court of First Instance for a case management conference (CMC) hearing on an early date to be fixed but not earlier than from 8 June 2012[17] with 2 hours reserved.

(2)  The parties shall before the CMC hearing, endeavour to agree on as many of the directions for the further conduct of the trial of the fraud issue.

(3)  The CMC questionnaire shall be filed and served no later than 7 days before the CMC hearing.

Costs

74. At the conclusion of the hearing after we pronounced judgment, we invited submissions on costs.  Mr Wong asked for the costs of the appeal and below on an indemnity basis.  For his part, Mr Yan invited us to make no order for costs.

75. We ordered that the costs both here and below should be paid by the plaintiff to the defendants.  The plaintiff is the party seeking an indulgence, having failed to comply with the Unless Order.  Its summons did not seek the reinstatement of the Points of Defence re Fraud, although that was the substantive relief required, and did not seek an order in the alternative of an order for the provision of further answers to the interrogatories. Hence, the costs before the Deputy Judge should be to the defendants.  But so too, in our opinion, should the costs of the appeal for similar reasons.  The plaintiff maintained in its notice of appeal that the answers were adequate and made no offer of further answers until the service of its skeleton submissions.  But for the provision of further answers, the Points of Defence re Fraud will not be reinstated.

76. We also declined to order taxation on indemnity basis since the invocation of LPP was not in bad faith and it is clear that the plaintiff tried to comply with the Unless Order.  Hence, our order was that the costs both here and below should be paid by the plaintiff to the defendants to be taxed and paid forthwith on a party and party basis, if not agreed, with a certificate for two counsel both here and below.

[1]   Rogers VP and Le Pichon JA.

[2]   This was necessary because of the requirements of RHC O.2 r.4, which imposes a 14-day time limit in which to apply for relief from a sanction flowing from failure to comply with a rule or court order and because the first summons, dated 25 January 2011, was taken out more than 14 days after 4 January 2011.

[3]   The Deputy Judge’s reference to T is to the associate of the plaintiff’s solicitors’ firm who filed the affirmation explaining the reason for failing to meet the deadline for filing the answers to the interrogatories.

[4]   Decision §35.

[5]   Decision §54.

[6]   Although for the reason set out below, we do not think that it is necessary to consider and resolve the issue of waiver of LPP.

[7]   Although, as I have noted above, I would respectfully differ from the Deputy Judge on the question of waiver by consent to answer the interrogatories.

[8]   “(j)  the effect which the granting of relief would have on each party.”

[9]   “(a)  the interests of the administration of justice;”.

[10]   “(b)  whether the application for relief has been made promptly;”.

[11]   “(d)  whether there is a good explanation for the failure to comply;”.

[12]   “(c)  whether the failure to comply was intentional;”.

[13]   “(f)  whether the failure to comply was caused by the party in default or his legal representative;”.

[14]   “(e)  the extent to which the party in default has complied with other rules and court orders;”.

[15]   “(h)  whether the trial date or the likely trial date can still be met if relief is granted;”.

[16]   “(i)  the effect which the failure to comply had on each party;”.

[17]   Being 21 days after the last date for compliance with the Unless Order.