SCHENKER INTERNATIONAL (HK) LTD v. NATURAL DAIRY (NZ) HOLDINGS LTD

HCA 1755/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1755 OF 2011

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JUDGMENT

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1.  This is the defendant’s appeal and the plaintiff’s cross-appeal from an order dated 20 August 2013 made by Master Levy (“the August order”) granting the defendant relief from an unless order conditional on payment into court of the full amount claimed by the plaintiff, such payment in to be made in four instalments. At the conclusion of the hearing, judgment was reserved which I now give.

Background facts

2.  The plaintiff commenced this action against the defendant in October 2011 suing for outstanding freight and related charges of approximately $4.4 million in respect of 67 invoices issued from May to September 2011.

3.  There is no written contract between the parties.  In its amended statement of claim dated 13 March 2013, the plaintiff alleges that the contract was made orally at various meetings held between February and April 2011, evidenced by or to be inferred from correspondence spanning a period of 11 months from November 2010 to September 2011, quotations and invoices and payments by or for the defendant and/or was to be inferred or implied from previous dealings.

4.  The defendant’s defence is that it was not the contracting party.  The meetings were attended not only by the defendant but also by Ms May Wang of UBNZ the defendant’s supplier.  The defence is that the contract was made between the plaintiff and UBNZ, with the defendant only being responsible for “extra charges”.

5.  After the close pleadings, the action was stayed for about  7½ months pending mediation.  That process failed on 8 February 2013.

6.  Pursuant to an order made prior to the stay, the parties were to file and serve their respective lists of documents within 28 days of the termination of the mediation, i.e. by 8 March 2013.  By the same order, the plaintiff was given leave to apply to amend its statement of claim within 21 days of the termination of the mediation which it did on 1 March 2013.

7.  Following the failed mediation, in early March, several days before the deadline for lists to be exchanged, the parties were engaged in settlement discussions.  In view of those discussions, the parties agreed to apply for a 14 day adjournment by consent, with the new deadline being 22 March 2013.

8.  While the plaintiff produced its list on 22 March 2013, the defendant applied by summons on that day for a 14 day extension.  The plaintiff’s response was a summons for an unless order returnable on the same day as the defendant’s application.

9.  On 2 April 2013 Master Levy ordered that “unless” the defendant filed and served its list on or before 16 April 2013, the plaintiff shall be at liberty to apply for judgment against the defendants together with interest and costs (“the April order”).  The plaintiff’s application for an unless order was allowed to be withdrawn.

10.  On the following day the defendant terminated the engagement of its former solicitors who however were not able to come off the record until 17 April 2013, the day after the deadline for the defendant to lodge its list.  As a result, the defendant whose director had endeavoured to prepare a list (“the 1^st list”) was unable to file it although a copy was delivered to the plaintiff’s solicitors before the deadline.  On  17 April 2013, a document with identical contents except for an amended back sheet (“the 2^nd list”) was received by the plaintiff’s solicitors.  It is accepted that the 1^st and 2^nd lists were deficient and non-compliant.

11.  The plaintiff lost no time in taking out a judgment summons which it did on 29 April 2013.

12.  The defendant engaged its present solicitors on 3 May 2013.  Their request to the plaintiff for time (30 days) to review the documents and to prepare the list was refused.  I pause here to observe that but for unnecessary forensic posturing and aggressiveness, matters might well have taken a different turn. 

13.  The defendant’s solicitors then prepared a list (“the 3^rd list”) that was exhibited (as exhibit YWTAW-1) to the affirmation of   Abraham Yung filed on 9 May 2013, the day after they filed their notice to act.  The 3^rd list was not formally filed as the defendant’s list until 21 August 2013.

14.  Initially, the defendant had opposed the judgment summons by filing Mr Yung’s affirmation only.  On 18 July 2013, out of an abundance of caution, the defendant took out a relief summons.  That summons and the plaintiff’s judgment summons were heard together on  31 July and 20 August 2013, culminating in the August order.

The appeal and cross appeal

15.  Being a rehearing de novo, in deciding the appropriate order to make on the judgment summons and the relief summons, the court has first to consider the nature and effect of the April order which gave rise to the summonses.

16.  At the hearings in July and August, the master appeared to have proceeded on the basis that the April order was an unless order, noting that the defendant was 2½ months late in applying for relief from sanction.  But that would be correct only if the April order were a conventional unless order, namely, the type of order described in paragraph 2 of Practice Direction 16.5, triggering 0.2, r.4.

The April order

17.  Its terms are unusual.  Although the expression “unless” forms part of the order, on analysis, the April order was not an “unless” order as it is normally understood.

18.  In pertinent part, Practice Direction 16.5 reads:

“2. The common form of peremptory order known as an ‘unless’ order should prescribe the period within which an act is to be done, failing which the ordered consequences will follow.

…

3. The other form of peremptory order in common use does not carry within its wording the sanction for disobedience …

An order of this nature is only preliminary to an ‘unless’ order and on disobedience a supplementary order in ‘unless’ form, setting out the sanction, should be obtained.  Until then the earlier order cannot be enforced.”>

19.  So when a party fails to perform what has been ordered by a conventional unless order within the time prescribed, the sanction specified in the order automatically takes effect unless within 14 days of the failure the party in default applies and obtains relief from the court: see  Daimler AG v Leiduck [2012] 3 HKLRD 119 at §47; O. 2, r. 4.

20.  The so-called sanction in the April order did not have automatic effect.  Nothing would happen unless and until the party not in default makes a further court application and obtains a further order.  The sanction or punishment for non-compliance was thus not automatic.

21.  Mr Wright, counsel for the plaintiff, submitted that it is not open to the defendant now to question the correctness of the April order since there was never an appeal from it.  That may be so but the court is not precluded on this appeal from considering the nature of the April order.  To describe it as a peremptory order takes matters no further.

22.  In my view, when, even at face value, the April order is not a conventional unless order, it would be incumbent on the court to take into account its true effect and, if necessary, all relevant facts that led to the making of the April order.

23.  Its effect does put into question the premise underlying the cross appeal which is that the plaintiff must be entitled to enter judgment for non-compliance with the April order once it makes the application required. But was the application to be a mere formality? Suffice it to say that had that been the intended effect, there would have been no reason for a conventional unless order not to have been made in the first place.  The fact that the master allowed the plaintiff’s summons for an unless order to be withdrawn reinforces the view that the order made was not a conventional unless order.

24.  In my view, it would be wrong to approach the judgment summons on the basis that, prima facie, the plaintiff was entitled to enter judgment.  To do so would be to give the April order an effect that could not have been intended.  Otherwise there would have been no reason for the master to have eschewed a conventional unless order.  

Material events

25.  That conclusion renders relevant the material events that led to the making of the April order.  Critically, the time summons culminating in the April order was the defendant’s first request.  There had been no prior breach.

26.  In that regard, Mr Wright’s submission that the April order had been preceded by two instances of failure on the part of the defendant to file and serve its list is a little disingenuous since prior to the time summons there had been no breach on the part of the defendant, the extension to 22 March 2013 was by consent of the parties as earlier explained.

27.  Non-compliance with the consent order of 8 March 2013 was the first occasion the defendant had breached an order of the court and, of itself, would not have warranted a conventional unless order because there had been no history of failure to comply with court orders.

The plaintiff’s case

28.  The judgment summons is supported by two affirmations of Henry Schmidl.  The first complains about the failure of the defendant to comply with the April order and the fact that the 1^st list received by the plaintiff’s solicitors before the deadline had been prepared by a director of the defendant without first obtaining the leave of the court.  The complaints were technical in nature.

29.  Apart from giving a chronological account of the action, the gravamen of Mr Schmidl’s 2^nd affirmation filed on 24 May 2013, is that all three of the defendant’s lists bore a striking resemblance to the plaintiff’s list and were improper and/or grossly insufficient and illusory.  The plaintiff’s list had itemised correspondence passing between the parties consisting of some 381 letters as well as numerous commercial documents such as bills of lading, quotations, packing lists, invoices, manifests etc altogether running to 29 pages.  It was said that the defendant’s lists were organized and described in the same manner as the plaintiff’s list.  In short, the complaint was that there had been extensive, if not wholesale, copying of the plaintiff’s list rendering the defendant’s lists illusory.

30.  As regards the 3^rd list, it is accepted that what appears under the heading “(D) Other Documents” comprising 7 items or categories of documents was not copied from the plaintiff’s list. 

31.  There is evidence that on 2 July 2013 the plaintiff requested production of the 7^th item described as “bundle of brief notes of meetings/telephone conferences” in the 3^rd list and that it had not been produced as at 25 July 2013.  That evidence is to be found in the affirmation of Cheung Wan Kam filed on the plaintiff’s behalf in reply to the affirmation of the defendant’s company secretary of 17 July 2013 in support of the relief summons.  Mr Wright complained that those documents had still not been produced.

32.  In his written submissions and orally at the hearing, Mr Wright took a number of new points.  First, he criticized the absence in the 3^rd list of any written or e-mail communications between the defendant (or its subsidiaries) and UBNZ.  It was said that if the defence advanced had any validity, the defendant would have in its possession “extensive communications” forwarding the plaintiff’s invoices to UBNZ and discussing which should be classified as “freight charges” and which as “extra charges”.

33.  Next Mr Wright criticised the defendant’s failure to disclose documents unfavourable to its defence but plainly in its possession, custody and power.  The documents referred to included, inter alia, two affidavits, one said to have been made by the defendant’s chief marketing officer, a Mr Shum and the other by a director of NZ Dairy, said to be the defendant’s associated company.

34.  It was strenuously urged upon this court that those matters demonstrate that the defendant was deliberately acting in breach of its discovery obligations and they were circumstances from which continuing non-compliance could be inferred.

35.  The difficulty with the new points made is that they were not made in the plaintiff’s affirmations.  As a result, the defendant has not had the opportunity to respond to them.  While Mr Chan attempted to proffer oral explanations at the hearing regarding the two specific instances mentioned (i.e. absence of written communications between the defendant and UBNZ and the failure to disclose the affidavits), the court simply cannot begin to go into the merits or otherwise of the new complaints, absent any proper evidentiary basis.  Accordingly, they must be disregarded for present purposes.

36.  Extensive copying of the plaintiff’s list was a major complaint.  On that issue, what the defendant had done is not what ought to have been done under the rules.  It is probable that given the circumstances in which it found itself, having dispensed with the services of its solicitors without first securing a replacement firm and the fact that there was a vast amount of common documents (i.e. inter partes correspondence and commercial documents passing between the parties), the plaintiff decided to take a ‘shortcut’.  It was a layman’s attempt to meet the deadline only to find that the 1^st list could not be filed because the former solicitors were still on the record.  In any event, the 1^st list was non-compliant.

37.  The defendant’s unorthodox conduct which has been a source of intense irritation to the plaintiff cannot be condoned.  In so far as what was copied comprised common documents, no real prejudice could have been caused.

Paragraph 2 of the August order

38.  Paragraph 2 of the August order reads:

“The Defendant be relieved from the sanction imposed by the Order of Master Levy herein dated 2 April 2013 for failure to file and serve its List of Documents by 4:00 pm on 16 April 2013 on the condition that the Defendant do make a payment into Court in the sum of HK$4,427,336 which sum shall be paid by 4 instalments as follows: …”

39.  It is apparent from those terms that the master’s order was premised on the basis that there was an automatic sanction for breach of the April order.  The condition imposed was the price the defendant had to pay for relief.  But as the premise upon which the order was based was false, the appropriateness of the condition must be called into question.

40.  Order 2, rule 3 (1) empowers the court to order a party to pay a sum of money into court where that party has, without good reason, failed to comply with a court order.

41.  Here the defendant did fail to comply with the April order under which it was required to file its list by 16 April 2013.  Disregarding the 1^st and 2^nd lists accepted to be non-compliant, the 3^rd list was provided to the plaintiff (although not formally filed) on 9 May 2013.  Even if the 3^rd list were also to be disregarded because no list had been filed as required by the rules, that failure would constitute a breach of the    April order and a second breach of court orders by the defendant.

42.  In deciding the appropriate order to make, those are the only facts to which regard is to be had.  No question of any relief from sanction under a conventional unless order arises because the April order did not give rise to any such sanction.

43.  The condition (of payment in) imposed is the type of condition associated with summary judgment applications and normally imposed where, for example, there is a good ground in the evidence for believing that the defence set up is a sham defence.  Quite apart from the fact that the application in question is not one for summary judgment, the present case is not about a sham defence.  Whether the defence (that the contracting party was not the defendant but its supplier UBNZ) will ultimately succeed is a matter for trial but there is nothing in the papers that would warrant a conclusion that the defence advanced is a sham defence.

44.  Where there is no proper basis for regarding a defence as a sham defence, it is evident that the imposition of a condition requiring full payment in of the amount claimed (in the present case a sum in excess of $4.4 million) would have serious consequences for the defendant.  Apart from affecting its cash flow, the condition could seriously hamper or even stifle the ability of the defendant to defend the claim.

45.  In exercising its discretionary powers, it has to be borne in mind that the primary objective is to secure a just resolution of the dispute in accordance with the substantive rights of the parties.  In my view, the condition imposed would not have furthered that objective.

46.  Mr Chan, counsel for the defendant, submitted that the condition imposed serves merely to punish and, as such, is not a proper reason for the exercise of the power.  He referred to the decision of Buckley J in Mealey Horgan plc v Horgan, (1999) The Times, 6 July 1999 for guidance as to the circumstances that would warrant its exercise.  That case concerned a breach of an order to file the defendant’s witness statement by a certain date.  The claimant had submitted that the court should be tough to ensure compliance with the new rules (i.e. the CPR) and that failure to adhere to them should be penalised.  But Buckley J considered that:

“a payment into court might be appropriate if a party had behaved worse than the defendants had in this case; that is, where there was a history of repeated breaches of timetables, court orders or something in the conduct of the party that gave rise to the suspicion that it was not bona fide and the court thought the other side should have protection.”

47.  On the facts, the defendant’s default (being 2 weeks late in serving its witness statement but which was served 6 weeks before trial) had not prejudiced the trial and had not significantly prejudiced the claimant.  In those circumstances the court considered that there could be no reason to require payment into court other than as pure punishment and Buckley J did not read the rules as encouraging the courts to punish this type of default.

48.  I respectfully agree with the approach of Buckley J.  That is consistent with the approach of Millett J in Logicrose Ltd v Southend Football Club Ltd, The Times, 5 March 1988, a decision of the pre-CPR era, where it was held that deliberate disobedience of a peremptory order, while a contempt, should not deprive a litigant of his right to a fair trial unless that conduct was deserving of punishment because that failure had rendered it impossible to conduct a fair trial.

49.  The concept of proportionality is a relevant consideration in circumstances where the court is minded to sanction a party for breach or non-compliance with the rules and court orders.  The sanction has to be commensurate with the gravity of the ‘crime’.  In Husband’s of Marchwood v Drummond Ltd [1975] 1 WLR 603, Russell LJ considered (at 606 G-H) that a condition requiring the defendants to pay the balance of the claim into court or be barred from defending the action because they had failed to comply with the discovery order to be “something which is quite inappropriate, in the sense that it is a punishment which does not fit the crime.”

50.  Proportionality of the sanction is a weighty factor in the weighing exercise to be undertaken on a fresh exercise the discretion: see per Fok JA in Daimler AG at §§ 57 et seq.

51.  The condition imposed on the defendant to pay into court the amount claimed prior to trial is draconian.  On the facts of this case, it is wholly out of proportion to the breaches that have occurred.  The order made was plainly wrong and unsustainable.

Conclusion

52.  The proceedings are at an early stage and no milestone has yet been reached.  Clearly, the objective must be to progress the action.  To that end proper discovery must go forward.  At the time the August order was made, the defendant had not yet filed its list.  Clearly it would have been appropriate for a conventional unless order to have been made at that stage having regard to the prior breaches but that is now water under the bridge since the defendant’s list was filed the day after the August order pursuant to paragraph 4 of that order.  If the plaintiff were to take the view that specific documents have been omitted, there are avenues it could pursue if so advised.

53.  In exercising the discretion afresh, I have no hesitation in setting aside the condition requiring payment into court.  But it is also important that the plaintiff’s request for production of documents identified in the 3^rd list be met.  I am troubled by the fact that four months have elapsed since a request was made for the production of item 7 under the “Other Documents” category.  In those circumstances, I consider it appropriate to order that those documents be produced within 14 days from the date of this judgment.  In all other respects, the April order is to take effect.

54.  There is to be an order nisi of costs in favour of the defendant with certificate for counsel.