MAN CHEUNG INTERNATIONAL TRADERS LTD AND ANOTHER v. CLSA LTD

CACV 97/2007

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 97 OF 2007

(ON APPEAL FROM DCCJ 6778 OF 2002)

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J U D G M E N T

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Hon Stone J:

The appeal

1. By Notice of Appeal dated 30 March 2007 the defendant herein, CLSA Limited, appeals against an Order of Deputy District Judge A. Chow made on 16 November 2006 whereby the learned judge dismissed an appeal against the Order of Master Tracy Chan dated 13 June 2006.

2. The learned Master had dismissed the defendant’s application for specific discovery, pursuant to its summons filed on 25 April 2006, which Order dismissing the application was upheld on appeal.

3. This, then, is the defendant’s further appeal, pursuant to leave granted by Deputy Judge Chow on 23 March 2007, whereby the defendant seeks to set aside the earlier orders, and to obtain the specific discovery it initially had sought well over two years ago.

The nature of the case

4. No discovery application can be viewed in isolation, and thus it may assist to say a few words about the nature and broad shape of this case, which on any basis is hardly complex.

5. The defendant is a stockbroker in Hong Kong.

6. The plaintiffs – for immediate purposes I put to one side which of the two plaintiffs in fact was the contracting client – dealt with the defendant.

7. The essence of the case is that on 3 November 2000 the plaintiffs placed an order with the defendant to sell 3,000 shares of a company known as Gemstar-TV Guide International (‘Gemstar’) on the NASDAQ exchange at a price of ‘US$75 or better’.

8. It is said that on that day sufficient buyers existed in the NASDAQ market to buy all 3,000 such shares at the stipulated price, but that for some reason the defendant only executed the order in terms of the sale of 1,000 shares at US$75.

9. By letter dated 1 December 2000 the plaintiffs complained at the omission to sell the entire lot of Gemstar scrip as had been instructed.

10. By letter dated 4 December 2000 the defendant confirmed the existence of the sell order at ‘US$75 or better’, but alleged the existence of a ‘market’ or ‘standard practice’ to the effect that the broker would not fill the entire order at the minimum price but would try and obtain a better price until the order was filled or the client had changed the instructions.  The defendant went on to say that 1,000 shares were sold at the stipulated price, but that since that date the Gemstar share price had never reached US$75, and that “accordingly” the balance of the order had not been completed.

11. The plaintiffs’ case thus is that they are entitled to damages to reflect the failure to sell at the stipulated price.

12. In fact, in mitigation of their alleged loss, on 14 December 2000 the plaintiffs had instructed the defendant to sell the remaining 2,000 shares at US$40.5625 per share, thus realizing the sum of US$81,025 – hence the damages claimed is the sum of US$68,875, which amount represents the difference between the sum of US$149,900 (2,000 shares at US$75) and US$81,025, as ultimately was achieved upon the sale of the balance.

13. In light of the sum at stake, the action was commenced in the District Court.

Progress of the proceedings

14. The writ in this action was issued on 2 November 2002, with a Statement of Claim endorsed thereon.

15. The Defence was filed on 3 December 2002.  There is no Reply.

16. Discovery and inspection followed thereafter, the defendant filing its List on 10 February 2003, a Supplemental List on 26 November 2003, and a Second Supplemental List on 25 March 2004, with the plaintiffs filing their own List on 20 June 2003, and a Supplemental Lists on 15 April 2005.

17. The Order 24, rule 7 summons issued by the defendant, which is the focus of this appeal, is dated 25 April 2006.

18. This summons is backed by an Affidavit of Eleanor Lam Sin Chee sworn on 27 April 2006, and is opposed by the Second Affidavit of Jeremy David Levy, sworn on 12 May 2006.

19. As indicated at the outset, this summons already has undergone two hearings, before Master Chan and Deputy District Judge Chow respectively, before culminating in this court.

20. If I may be permitted to say so, satellite litigation of this sort achieves little, save for obvious and unpalatable delay and wholly unnecessary wasted costs, and for my part I am unable to understand why this case, and in particular this aspect of the case, has been permitted to develop in the way that it has.  It strikes me that a liberal dose of good sense would and should have prevented a minor and easily resolvable discovery disagreement from escalating into a major argument requiring resolution at Court of Appeal level: either documents of the type sought by the defendant exist, in which case they should have been produced, or if they do not, or if there are no documents to be further discovered in addition to those already particularized within the plaintiff’s Lists, then a simple and straightforward Order 24, rule 7 affidavit to that effect would have been conclusive. 

21. Moreover, in the broader context it is also worth making the point that on the face of the pleadings this dispute is eminently straightforward, and it is surprising that a simple (and, if I may say so, relatively small) commercial claim, wherein, at least on the face of the pleaded issues, the only issue of substance is the meaning/implication to be attributed to the phrase “or better” – as to which, in the ‘pure market context’ at least the answer strikes me as entirely clear – should have been permitted to drag its procedural feet to the extent that a decision on the merits is unlikely now to be forthcoming until some 8 years after the events giving rise to the cause of action.

22. Be that as it may.  That which now, regrettably, is required to occupy the attention of this court is the appeal upon the specific discovery issue, and it is to the detail of this that I now turn.

The specific discovery summons

23. The defendant’s specific discovery summons, initially issued on 25 April 2006, was subsequently amended before the hearing below to add an additional general ground (at (iii) below).

24. As thus amended, this summons seeks the following categories of documents:

(i)	documentation relating to the opening and operating of the securities trading account with the defendant on behalf of the 1st plaintiff by the 2nd plaintiff;
(ii)	documentation relating to the trading of shares listed with the Australian Stock Exchange and the Nasdaq Exchange by the defendant on the instructions of the 2nd plaintiff on behalf of the 1st plaintiff, including but not limited to trading in shares in ‘Gemstar’, Climax Mining, Woolworths Limited, Aeroflex Inc., Misonix Inc. and Citric Systems Inc.;
(iii)	alternatively, there be a further and better List served by the plaintiffs in their possession, custody and power relating to ‘any matter in question in this action’.

Applicable principle

25. Applicable legal principle is, as one would expect, not in dispute.

26. The learned Deputy Judge correctly summarized the legal principles relating to specific discovery at paragraph 7 of his judgment below: see Berkeley Administration Inc v. McClelland [1990] FSR 381,cited and summarized by Cheung JA in Paul’s Model Art GMBH & Co. KG v. UT Ltd & Ors [2006] 1 HKC 238 (at paras 24-32).

27. The test for an Order 24, rule 7 application are first, the probability of existence of the documents sought, second, the relevance thereof, and third, that such documents are in the possession, custody or control of the party from whom such specific discovery is sought.

The specific categories

Category (i)

28. It is accepted that this first category is confined to communications between the two plaintiffs in relation to the opening and operation by the 2^nd plaintiff on behalf of the 1^st plaintiff of the securities trading account with the defendant.

29. The plaintiffs do not contest the finding of the Deputy Judge below that such documents probably exist and are probably in the plaintiffs’ possession.

30. Thus, the real dispute in this category centres upon the relevance of this category of documents.

31. At paragraphs 11-17 of his judgment, the learned judge below analysed the position on the pleadings, noting in particular the denial in the Defence that the defendant had any contractual relationship with the 1^st plaintiff, and further that the affidavit of Ms Lam sworn on behalf of the defendant avers that it is undisputed that the 1^st plaintiff had instructed the 2^nd plaintiff to place orders of various kinds with the defendant broker, and thus that, on its face, there was no dispute as to the authority of the 2^nd plaintiff so to act.

32. For the defendant, in his helpful skeleton argument Mr Westbrook SC has argued that the learned judge was quite correct to conclude that any documents within Category (i) were not relevant to the pleaded issues, and that he was correct also to find that there was no ‘live’ dispute as to the authority of the 2^nd plaintiff to act on behalf of the 1^st plaintiff; he maintained that the agency for a disclosed principal was obvious from the documents disclosed relating to the disputed share trade.

33. On behalf of the defendant, Mr Beresford submitted that it is the defendant’s case that communications between the 1^st and 2^nd plaintiffs will tend to show, directly or by inference, whether in dealing with the defendant the 2^nd plaintiff was acting qua principal or qua agent, and in turn, therefore, whether the defendant owed a duty of care in tort to the 1^st or 2^nd plaintiffs, and if so, whether it was discharged. 

34. The further implication of this, he said – and it is this element of the case which is the important point in this context – was whether the practical ‘in house’ meaning to be attributed to the phrase ‘or better’, as contended for by the defendant, had been brought to the attention of the 1^st plaintiff and/or to the 2^nd plaintiff, the defendant having pleaded (at para 7(3) of its Defence) that the standard practice of the defendant broker with regard to “or better” instructions specifically had been made known to the 2^nd plaintiff through conversations between a Ms Man of the latter and Ms Cheung of the defendant prior to 3 November 2000, and from the previous course of dealing between the 2^nd plaintiff and the defendant.

35. In my view there is something in this argument, and I am far from sure that the learned judge below fully recognized its discovery implications. 

36. I accept, of course, as Mr Westbrook submitted, that for all practical purposes it makes no difference whether it is the 1^st or the 2^nd plaintiff which recovers against the defendant, nor whether it is the 1^st or 2^nd plaintiff which is the contracting party, but this is nothing to the immediate point, which, from the standpoint of the defendant’s case, is to affix the 1^st plaintiff principal and/or the 2^nd plaintiff agent with the knowledge that the term “or better” has the particular meaning/implication attributed to it by the defendant, thereby enabling the defendant to establish that the 1^st plaintiff, qua contracting party, was in possession of such knowledge pursuant to communication with its agent, the 2^nd plaintiff, and further to verify the specifically pleaded factual allegation (see paragraph 7(2) of the Defence) that the defendant indeed had informed the 2^nd plaintiff of such meaning.

37. Such communication(s) between the 1^st and 2^nd plaintiffs may or may not establish that which the defendant now seeks to establish as part of its case, but it seems clear that this category of documents simply cannot be dismissed as irrelevant, and may have the effect of proving or disproving this salient issue; in Peruvian Guano terms, therefore, that such discovery may promote a relevant line(s) of inquiry and have the effect of buttressing the defendant’s case or of undermining that of the plaintiff.

38. In what turned out to be his main argument upon this appeal, Mr Westbrook has forcefully submitted before us that the learned judge below, and for that matter the learned Master before him, had been entirely correct in concluding that there was no evidence of the existence of inter-plaintiff communications which would establish any case relating to the plaintiff’s understanding of the particular meaning to be attributed to the term “or better”, and that this was no more than a ‘fishing’ expedition, the more so since in their Lists of Documents as filed the plaintiffs had put into discovery everything that was considered of relevance to the pleaded issues, and that what was now occurring was that the defendant in effect was seeking to verify the ambit of such discovery.

39. Mr Beresford met this argument – which was mounted generally with regard to the two specific categories of documents the subject of this specific discovery application – by submitting that this was certainly not ‘fishing’, and that in light of the pleaded issues his client was entitled to such documentation as had passed between the plaintiffs, suggesting that the circumstantial probability was that relevant documents existed from which at the least inferences could be drawn as to the requisite knowledge on the part of the plaintiffs of the ‘house meaning’ of the rubric “or better”. In the course of this submission Mr Beresford drew the court’s attention to a Lexis transcript of the English Court of Appeal decision in Conopco Inc v. Ernst and Young dated 1 September 1993 in which Evans LJ rejected like arguments of ‘fishing’.

40. I accept that this exercise is not ‘fishing’ in the accepted sense, given the probability of existence of this class of documents, and in the circumstances of this case I have concluded that this element of the specific discovery application should have been allowed, and that the learned judge below was in error in not recognizing the force of the specific discovery submission made on behalf of the defendant, and thus in dismissing this category of documents as irrelevant and non-discoverable.

41. However, I have also taken the view that it is unsatisfactory that in its present form the request is temporally unlimited, and accordingly I would qualify the specific discovery sought under the 1^st category so that it is restricted to documentation passing between the 1^st and 2^nd plaintiffs from the date of the opening of the securities trading account with the defendant by the 2^nd plaintiff on behalf of the 1^st plaintiff up to and including the date of the ‘Gemstar’ transaction, namely 3 November 2000.

Category (ii)

42. The second category essentially reflects the other side of the same specific discovery coin, the affidavit of Ms Lam in support of the application suggesting that documentation referable to the Gemstar trade and other trades in Australian shares would contain information on how the defendant would and did execute an “or better” order “such that the 1^st plaintiff would understand the potential consequence of it” in instructing the 2^nd plaintiff to place a trading order on this basis.

43. In the court below the learned judge once more agreed with the conclusions of the Master who, inter alia, indicated that she was not satisfied that such documents as existed would contain information indicating whether the 2^nd plaintiff had explained the nature and consequences of the different types of order, and in particular the defendant’s view of the meaning/implication of the “or better” rubric.

44. Before us, Mr Westbrook SC repeated the submission that in this regard both the Master and the Deputy Judge were entirely correct in the conclusion to which they came, noting that the pleaded issue related only to what passed between representatives of the 2^nd plaintiff and the defendant, and that the courts below were right in failing to be satisfied that such documents existed, at least in the sense of containing the explanations as to the meaning to be attributed to the rubric “or better” in which the defendant now was interested.

45. To the contrary, Mr Beresford’s approach mirrored the argument as had been utilized in regard to the first category of specifically discoverable documents; as he put it: “the communications between the plaintiffs can reasonably be expected to show or allow inferences to be drawn as to whether the practice had been incorporated into the contract and discovery ought therefore to have been ordered.”  Once again, therefore, in terms of the existence of such documents from the defendant’s standpoint the doctrine of circumstantial probability ruled the day.

46. There clearly is substantial overlap between the 1^st and 2^nd categories of documents, albeit having decided that the 1^st category should be discovered in my view it did not inevitably follow that there should be similar success in terms of this second category.

47. For my part I was concerned that, whilst for these purposes I was prepared to assume the probability of existence of relevant documents, it struck me with some force that the second category of documents as sought on the face of the application was unnecessarily wide and unlimited, and for this reason potentially oppressive, and as such likely to be subject to discretionary refusal on this basis alone.

48. It was in this context that during this appeal the court expressed its misgivings in this regard to Mr Beresford, and the hearing was briefly stood down in order for counsel to consider some form of limitation to this second category, although it was clear on the face of the pleading that there was some justification for the width of the request given that the defendant was alleging a course of dealing between the parties (see paragraph 7(3) of the Defence) wherein it was averred that in addition to the alleged conversations on the point between Ms Man and Ms Cheung prior to 3 November 2000, that the ‘house practice’ of the defendant with regard to the “or better” instruction could be divined “from the previous course of dealing between the 2^nd plaintiff and the defendant”.

49. In the event having considered the court’s concern that the application within the 2^nd category was unnecessarily wide, Mr Beresford drew our attention to a ‘Schedule of the Trading History between Asiacorp Nominees and CLSA Limited’, which was exhibited as “JDL-3” to the affidavit of Mr Levy in opposition to the application.

50. From this schedule in transpired that out of the initial 73 share dealing transactions as recorded between the defendant broker and the 2^nd plaintiff up to and including the ‘Gemstar’ trade, in 26 of these transactions (which covered the period 15 June 1998 to 3 November 2000) the client name was listed as ‘Man Cheung’, the 1^st plaintiff herein, and thus the concern that this was a bottomless specific discovery pit was to a large extent assuaged.  Added to this, Mr Beresford made it clear that he would be content to obtain discovery of such documentation relating to the discovery of documentation referable to trading in these shares when, and only when, such trades themselves had been conducted on an “$X or better” basis.

51. I am satisfied, albeit with these twin limitations engrafted thereon, that the specific discovery application also should be granted in terms of this 2^nd category, and that, in part at least, the conclusion of the learned judge below was in error.

Category (iii)

52. The learned judge below does not appear to have considered the amendment to the summons before him, and if I may say so this was understandable in light of the broad terms of such amendment at 1A of the summons.

53. In this regard Mr Beresford did attempt to justify and explain the rationale for the introduction of this final category, but I regret that I was wholly unable to grasp the point.

54. It seems to me that either a case for specific discovery is made out in all the circumstances, or it is not, and for my part I fail to perceive the relevance of an amendment to a specific discovery application which makes reference, in terms, to the obligation of general discovery.

55. It is also fair to observe, Mr Levy’s affidavit demonstrates, that the plaintiffs and their solicitors are well aware of their general duty as to discovery under Order 24, rule 8.

Order

56. In light of the foregoing I would make the following Order, the terms of which mirror the classifications employed in this judgment:

That the appeal be allowed and the decisions of the learned Deputy Judge and of the Master below be set aside, and that in substitution therefore there be an Order :
(1)	in terms of paragraph 1(i) of the Amended Summons, save and except that such discovery be limited to the period from the date of opening of the account with the defendant by the 2nd plaintiff on behalf of the 1st plaintiff up to and including 3 November 2000;
(2)	in terms of paragraph 1(ii) of the said Summons, save and except that such discovery be limited to such of the 26 transactions (referred to at paragraph 49 hereinbefore) which were conducted on an “or better” basis.

57. At the conclusion of this hearing the court indicated to counsel that it would be minded to make an order nisi as to costs.

58. After reflecting at some length on the circumstances of this case, I would make an order nisi that the costs orders below be set aside, and that the costs of the discovery applications before the Master and the Deputy District Judge are to be the defendant’s costs in the cause, and that the costs of this appeal are to be to the defendant in any event, to be taxed if not agreed.

Hon Stock JA:

59. I have read and agree with the judgment of Stone J.

60. There will therefore be an Order in this appeal in the terms specified in paragraphs 56 and 58 above.