HCA 2215/2009
IN THE HIGH COURT OF THE
HONG KONG SPECIAL ADMINISTRATIVE REGION
COURT OF FIRST INSTANCE
ACTION NO. 2215 OF 2009
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BETWEEN
MARK CLINTON SHARP
Plaintiff
And
WONG CHI LIK, STEVEN
1st Defendant
CHAN WAI LING, IRIS
2nd Defendant
_________________________
Coram : Before Master Marlene Ng in Chambers (Open to the Public)
Date of Hearing : 23 October 2009
Date of Decision : 23 October 2009
Date of Handing Down Reasons for Decision: 3 November 2009
_________________________
REASONS FOR DECISION
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I. Background
1. By an Amended Summons filed on 14 September 2009 (“Amended Summons”), the 1st and 2nd Defendants applied for an order that the Plaintiff do provide security for their costs up to and including the stage of Pre-trial Review (“PTR”), and that the action be stayed pending the provision of such security.
2. There is some history to these proceedings, which I shall attempt to summarise briefly. The Plaintiff commenced the present action on 6 November 2008 and immediately obtained an ex parte injunction against the 1st and 2nd Defendants restraining them from disposing of the sale proceeds of their joint property at King’s Park Road, Kowloon (“Property”).
3. The 1st and 2nd Defendants’ former solicitors filed Notice to Act on 12 November 2008. It turned out that the 1st and 2nd Defendants had already sold the Property, so on 14 November 2008 the injunction was varied and converted to a Mareva injunction restraining them from disposing of their assets in Hong Kong up to a certain limit being the equivalent of the net sale proceeds. The Plaintiff was also ordered to fortify his cross-undertaking as to damages by paying a sum of HK$200,000.00 into court or by providing a bank guarantee of like amount within 14 days (“Fortification”).
4. By a written decision dated 23 December 2008 (“Decision”), Saunders J ordered that the injunction be continued until trial, and granted case management directions and timetable on a tight schedule for the purpose of speedy trial. But further fortification of the Plaintiff’s cross-undertaking as to damages was refused.
5. On 31December 2008, the 1st and 2nd Defendants applied for legal aid, which applications were refused on 3 February 2009. As a result of the automatic stay, the Statement of Claim was filed and served on 6 February 2009. On 10 February 2009, the 1st and 2nd Defendants filed Notice to Act in Person and applied by summons for the release of a sum of HK$550,000.00 from the monies ring-fenced by the injunction in order to engage lawyers. On 26 February 2009, Saunders J adjourned such application for further evidence to be filed. On 20 March 2009, notwithstanding the filing of further evidence, he dismissed the application.
6. Thereafter on 31 March 2009, the Plaintiff applied to amend the Writ of Summons. On 2 April 2009, the 1st and 2nd Defendants’ present solicitors came on record, and the Defence and Counterclaim was filed and served on 15 April 2009.
7. After the close of pleadings, discovery became the main feature of the proceedings. On 9 April 2009, the 1st and 2nd Defendants applied by summons for an order requiring the Plaintiff to produce copies of certain documents referred to in the Statement of Claim. It eventually transpired that they only wanted to inspect such documents, and inspection took place in May 2009.
8. The Amended Writ of Summons and the Reply and Defence to Counterclaim were filed on 5 and 7 May 2009 respectively. The parties’ respective Lists of Documents were filed and/or served in June 2009. The 1st and 2nd Defendants took exception to the lack of proper itemisation of certain bundles of documents listed in the Plaintiff’s List of Documents, and issued a summons on 18 June 2009 seeking enumeration of such documents for proper identification. Eventually, with leave of the court, the Plaintiff filed an Amended List of Documents that elaborated on such documents, and inspection took place thereafter.
9. On 25 August 2009, the 1st and 2nd Defendants issued a summons requiring the Plaintiff to file and serve further and better particulars of the Statement of Claim pursuant to a request made on 27 July 2009. The answerwas filed on 18 September 2009.
10. The above chronology of events shows that the present action has progressed more slowly than the timetable laid down by Saunders J. But it is fair to say the learned judge could not have anticipated some of the subsequent developments, including the legal aid stay and the issues over discovery.
II. The application
11. The present application is made under Order 23 rule 1 of the Rules of the High Court. Both Mr Chang, counsel for the Plaintiff, and Mr Hart, solicitor for the 1st and 2nd Defendants, do not dispute the Plaintiff is ordinarily resident outside jurisdiction.
III. The opposition
12. The Plaintiff opposed the application on several grounds as follows:
(a) the Plaintiff had a very strong case against the 1st and 2nd Defendants;
(b) the 1st Defendant had a counterclaim against the Plaintiff on the same or substantially the same matters as the Plaintiff’s claim, thus making it unjust to order security against the Plaintiff;
(c) the 1st and 2nd Defendants failed to adduce evidence of any difficulty in enforcing any costs order against the Plaintiff in the United States;
(d) if the 1st and 2nd Defendants were required to provide security, the amount sought was excessive, and sufficient security had already been provided by the Fortification paid into court by the Plaintiff.
13. The affidavits of the solicitor for the Plaintiff seem to suggest there was unacceptable delay in making the present application. But Mr Chang confirmed he would not take such point against the 1st and 2nd Defendants.
IV. Foreign plaintiff
14. It is trite that the power to order security for costs is discretionary and the court should have regard to all the circumstances of the case (see Wing Hing Provision, Wine & Spirits Trading Co Ltd v Hanjin Shipping Co Ltd [1998] 4 HKC 461). There is no inflexible or rigid rule that a foreign plaintiff must provide security as a matter of course. However, as a matter of discretion, it is common that the court will require a foreign plaintiff to give security for costs because it is ordinarily just to do so (see PT Graha Multimulia Cemerlang v Silver Tech Enterprises Ltd HCCW 883/2004, Kwan J (as she then was) (unreported, 1 March 2005) and Tsang Yee Mui v The Personal Representatives of Mak Chik Wing, the Deceased & anor HCA 2606/2006, Chu J (unreported, 21 July 2008) citing Mon tgomery Ward & Co, Inco rporated v Evergo Trading Company Limited & anor CACV 32/1996 (unreported, 31 May 1996)).
V. Probability of success
15. In considering all the circumstances, the court will have regard to the Plaintiff’s prospect of success, but it should not go into the merits in any detail unless it can be clearly demonstrated one way or another there is a high degree of probability of success or failure (see Wing Hing Provision, Wine & Spirits Trading Co Ltd at p.464). Mr Hart cited PT Graha Multimelia Cemerlang and reminded that the threshold of demonstrating the probability of success in this situation was very high.
(a) Plaintiff’s case
16. In the Decision, Saunders J succinctly summarised the Plaintiff’s case as evident from the affidavit evidence filed for the injunction proceedings. Although the Decision was handed down before any pleadings were filed, a careful study of thePlaintiff’s pleadings show that they do not take his case any much further.
17. The Plaintiff claimed that he and the 1st Defendant all along operated their own independent businesses although there were mutual business dealings between their various United States and Hong Kong companies, and the Plaintiff’s company earned 5% commission for acting as sales agent/representative for the 1st Defendant’s company. The 2nd Defendant was the 1st Defendant’s girlfriend as well as director, minority shareholder and operations manager of the 1st Defendant’s Hong Kong company. The 1st and 2nd Defendants were also the joint owners of the Property before it was sold at a reduced price in October 2008, ie more than a month before the due date for completion of the sale and purchase.
18. The Plaintiff further claimed that in/about 1996 he entered into a verbal partnership agreement with the 1st Defendant on the basis that (a) the 1st Defendant’s companies would source merchandise in Asia and the Plaintiff’s company would sell them for profit in the United States and (b) the Plaintiff and the 1st Defendant would share the direct expenses for the merchandise as well as the partnership’s net profits.
19. It was said that in 1997-1998 the partnership business was financed by an open credit line of US$1,000,000.00 by a Mrs Lee through a trading company called Asia Global in return for payment of 2% per 60 days for money costs. In 1999, the factory selected by the 1st Defendant for producing a particular product for the United States market failed to meet Mrs Lee’s requirements and she withdrew her financial support. The Plaintiff therefore left his share of the partnership profits in the 1st Defendant’s control for use as operating capital for the partnership business, and in/about June 1991 the 1st Defendant agreed to pay interest at a rate of 3.5% pa.
20. It was further said that since 1999 the 1st Defendant provided annual written account of expenses incurred for the partnership business to the Plaintiff who would use such information to compile annual income statement from which pre -tax profit report would be prepared and delivered to the 1st Defendant annually.
21. At a dinner atShenzhen in December 2007, the 1st Defendant admitted to the Plaintiff that he had spent the Plaintiff’s share of the net partnership profits under his control on bad investments, on his family in the United States and on company expenses unrelated to the partnership business, and he proposed to give the Plaintiff legal ownership of his life insurance policy (“Policy”) and the proceeds of the Property upon sale of the same. Such proposal was evidenced by a contemporaneous email from the 1st Defendant to the Plaintiff dated 21 December 2007 (“1st Email”) apologising for “what had happened” and for not telling the Plaintiff earlier and confirming the aforesaid proposal.
22. The Plaintiff asserted that at a subsequent meeting on 4 January 2008, the 1st and 2nd Defendants again apologised for the aforesaid misappropriation of monies and voluntarily signed a document confirming their agreement to give the Property to the Plaintiff and his wife or pay over the net sale proceeds if they sold the Property (“2nd Document”).
23. In January 2008, the 1st Defendant sent paperwork to the Plaintiff for transferring the legal title of the Policy to the Plaintiff and his wife, but ceased to pay the premium for such Policy. On 9 July 2008, the Plaintiff sent an email to a Ms Taylor, the book-keeper for the Plaintiff’s companies, explaining that the partnership had no money because he had used about US$2,000,000.00 on his family and bad investments and about US$700,000.00 on the Property (“3rd Email”).
24. On 30 September 2008, the Plaintiff’s solicitors demanded the 1st Defendant to execute a deed of loan assigning the right to the proceeds from any sale of the Property to be directed by the Plaintiff, to continue to pay all premium due on the Policy, and to provide full written account of all sums due and owing to the Plaintiff with proposal for repayment. On 13 October 2008, the former solicitors for the 1st and 2nd Defendants asked the Plaintiff’s solicitors for justification of the requests with documentary support. In the meantime, unbeknownst to the Plaintiff, the 1st and 2nd Defendants sold the Property and used part of the proceeds, which eventually led to the injunction proceedings.
25. The Plaintiff therefore claimed against the 1st Defendant on the grounds of constructive trust, breach of fiduciary duty and/or trust, money had and received and contract for inter alia all necessary accounts and enquiries upon dissolution of the partnership pursuant to the 1st Defendant’s notice dated 21 November 2008 and an order that upon taking such accounts and enquiries the 1st Defendant shall personally answer for amounts due to the Plaintiff for breach of fiduciary duty and/or trust, constructive trust and/or money had and received. The Plaintiff further claimed against the 2nd Defendant on the grounds of constructive trust, knowing receipt and contract inter alia for an account of the sale proceeds of the Property being trust monies, for an order for payment of the same to the Plaintiff and/or for damages.
(b) 1st and 2nd Defendants’ case
26. The 1st and 2nd Defendants respectively filed various affirmations for the purpose of the injunction proceedings. As in the case for the Plaintiff, their Defence and Counterclaim did not take their case as set out in the affirmation evidence much further.
27. The 1st Defendant claimed that the Plaintiff was the sales representative of his Hong Kong and United States companiesat 5% sales commission. There was no sales commission due to the Plaintiff’s company. In/about October 1996, the Plaintiff and the 1st Defendant verbally agreed to form a partnership business whereby the latter would source products for sale by the former in the United States on the basis of equal sharing of the net profit after expenses, but there was no agreement to pay commission to the Plaintiff or his company and no discussion between the partners forthe sharing of direct expenses as alleged by the Plaintiff. The 1st Defendant’s brother who was involved in the 1st Defendant’s partly-owned United States company was not informed of such partnership.
28. The 1st Defendant claimed that between January 1997 and March 1999 Asia Global assisted him in sourcing and producing merchandise for the partnership business for which the Plaintiff and the 1st Defendant agreed to pay 5% commission. Apart from paying such commission, the partnership had no other expenses. Asia Global did not offer any specific credit line, but prepaid the initial cost of sourcing the merchandise from the factories at a finance charge of 1% per month which was agreed by the Plaintiff and the 1st Defendant. The Plaintiff’s company should not have charged any commission during this period, but later did so because the Plaintiff claimed it was necessary for tax purpose but such commission was agreed to be deducted from partnership profits.
29. The 1st Defendant claimed that he and the Plaintiff received less than 10% of the net profit, so when Asia Global’s manufacturer tried to increase its costs by 10% they ceased to work with Asia Global and turned to a small PRC factory found by an employee of the 1st Defendant’s Hong Kong company. A further reason why Asia Global ceased to be involved was because Mrs Lee was dissatisfied with the design of a new product and refused to finance it. Without such financing, the partnership started to incur expenses for exporting products to the United States. The Plaintiff and the 1st Defendant agreed that the partnership expenses (including those incurred by the 1st Defendant’s partly-owned United States company) covered both direct and indirect expenses.
30. The Plaintiff and the 1st Defendant did not ascertain profits for that year because money was needed for the partnership business. The 1st Defendant advanced other financing for running the partnership business via a bank credit line in favour of his partly-owned United States company, so he denied that the Plaintiff’s share of the profits were left for use in the partnership business or that he agreed to pay interest at 3.5% pa to the Plaintiff.
31. The 1st Defendant further claimed that since the commencement of the partnership business, the Plaintiff only asked him to provide information as to the direct expenses of the merchandise and not details of the partnership expenses until early 2008 when the Plaintiff asked for the expenses for 3 years so to average out the last 10 years’ expenses in order to calculatethe Plaintiff’s estimated profit share. Thus, the Plaintiff’s allegations as to his share of the partnership profits were based on his own figures, which were not approved by the 1st Defendant. The 1st Defendant denied having sent statements of partnership expenses to or received partnership income statements and pre -tax profit reports from the Plaintiff, and if his book-keeper had sent such information about expenses to the Plaintiff, he had not approved them as having set out all relevant partnership expenses.
32. It was said that between 1999 and 2008 the Plaintiff received substantial sums through the 2% charge and advances against profits (which were not yet ascertained). These sums included sums from the 1st Defendant in respect of the partnership business, from the 1st Defendant’s partly-owned United States company, from the Plaintiff’s wrongful surrender of the Policy in/about October 2007, and from payment by the 1st Defendant’spartly-owned United States company to the Plaintiff’s company on the Plaintiff’s behalf in respect of monies outstanding, such that the Plaintiff was believed to have been overpaid by at least US$1,171,359.18 for his share of the partnership profits for the period from 1997 to 2008. Thus, there was no share of the partnership profits due to the Plaintiff and he should in fact contribute to the partnership losses.
33. The 1st Defendant denied he made any admission of having used the Plaintiff’s share of the partnership profits for his own purpose, but he acknowledged that he had expressed that cash was tight and he had big expenses. At the dinner in Shenzhen in December 2007 before the Plaintiff returned to the United States after a long stay in Mainland China, the Plaintiff alleged that the 1st Defendant owed him money without giving any particulars of the alleged debt, so the 1st Defendant sent the 1st Email at the Plaintiff’s request to comfort the Plaintiff’s wife by reassuring her that the 1st Defendant’s brother would continue to support the partnership even though it had no money and by explaining why the 1st Defendant visited China for so long. The 1st Defendant claimed that on true construction of the 1st Email, it was to show that he would use best endeavours to repay any money that might be established to be due to the Plaintiff.
34. The 1st and 2nd Defendants claimed that during the lengthy meeting in the United States when they signed the 2nd Document,the Plaintiff failed to say how much the 1st Defendant owed him, but he refused to let them leave until they signed such document. The 2nd Document was not intended to be legally binding but was made on the same basis as the 1st Email that if the Plaintiff were able to establish that monies were due to him from the partnership, the 1st Defendant would agree to pay the same and the 2nd Defendant signed to verify this on the basis of sale of the Property.
35. The 1st Defendant explained the background to the 3rd Email as follows. The Plaintiff wrongfully withheld cheques from a United States retailer in the total sum of US$480,000.00 that were payable to the 1st Defendant’s partly-owned United States company for over 2 months, which resulted in interest being payable by the 1st Defendant’s brother. As a result of threatened legal action by the 1st Defendant’s brother, the Plaintiff handed over the cheques.
36. In respect of the Policy, the 1st Defendant purchased such Policy in January 2000and named the Plaintiff and his wife as beneficiaries. The 1st Defendant pleaded that (a) when he found out in 2004 he had kidney cancer he informed the Plaintiff about such Policy, (b) at the Plaintiff’s request in 2008, he transferred legal ownership of the Policy to the Plaintiff as a gesture of goodwill in view of their friendship in light of the Plaintiff’s repeated claims that he owed the Plaintiff money and as an indication that he would agree to use his best endeavours to arrange payment of any monies found to be outstanding, and (c) without his knowledge the Plaintiff encashed the Policy in/about October 2008 and received total funds of about US$140,000.00.
37. The 1st and 2nd Defendants claimed they sold the Property as a result of commercial pressure from bankers to the 1st Defendant’s companies, and the completion of the sale and purchase took place earlier than scheduled at a reduced price due to the purchaser’s threatened withdrawal from the purchase.
(c) Analysis
38. In the Decision, whilst recognising that the Statement of Claim was not yet filed, Saunders J held there was a strong arguable case on the part of the Plaintiff to say that his case as set out in the affidavit evidence constituted the relevant facts, and there was a good arguable case against the 1st Defendant on the grounds of constructive trust, money had and received and contract. In paragraph 27 of his Decision, the learned judge said as follows:
“The documentary evidence, and [the 1st Defendant’s] failure to raise any complaint at all until these proceedings were issued, all strongly supports [the Plaintiff’s] version of the facts. I am satisfied that there is a strong arguable case that [the 1st Defendant] has misappropriated partnership funds for his own purposes, that he has admitted that to [the Plaintiff], and that in consequence of that admission he has agreed that he will sell the [Property] owned by him and [the 2nd Defendant], and pay the net proceeds of sale thereof, after repayment of the bank loan, to [the Plaintiff] in recompense of the money misappropriated.”
The learned judge came to the view there was nothing to detract from his conclusion that the Plaintiff had “a strong arguable case for an account within the partnership and that [the 1st Defendant’s] documentary acknowledgment to pay the proceeds of the sale of the [Property] to [the Plaintiff] makes a strong arguable case that consequent upon that accounting, substantial sums will be payable by [the 1st Defendant] to [the Plaintiff]. This is a case which [the learned judge has] no hesitation in saying, could well succeed at trial. As well as a strong arguable case for an account within the partnership, [the Plaintiff] has a strong arguable case for specific performance of the [2nd Document] ……” (paras.33-34 of the Decision).
39. Mr Hart submitted that the Decision was not indicative of the merits, especially when it was handed down before any pleadings were filed. Bearing in mind the relevant criteria for an interlocutory injunction is merely that of a good arguable case, the Decision was just a preliminary run on the facts of the case on which no weight could properly be attached. Mr Hart argued that the pleadings as filed were neutral, and even now the witness statements had not yet been exchanged and the case had not been set down for trial. He reminded that the events in question took place over a span of about 10 years, and further submitted that the merits turned largely on oral testimony from the parties as to the terms and breakdown of the partnership and that witnesses’ credibility depended on cross-examination. Further, the 1st and 3rd Emails and the 2nd Document were open to different interpretations and the court in construing such documentary evidence depended on careful study of the whole document and on submissions. Therefore, it was not possible to say at this stage that on the totality of materials before the court the Plaintiff’s claim had a high probability of success.
40. Mr Chang was referred to the annual expense and income statements (see paragraph 20 above), but I am prepared to put aside such documents for the purpose of the present application since the 1st Defendant denies having sent or received them. But I cannot ignore Mr Chang’s submissions (which I agree) that although pleadings have not been filed at the stage of the injunction proceedings, both parties have filed substantial affidavits/affirmations which put forward the Plaintiff’s and the 1st and 2nd Defendants’ respective case as well as causes of action or defence. It is open to this court to consider those affidavits/affirmations, and as pointed out above, the pleadings do not carry the parties’ respective case much further than the affidavit/affirmation evidence. There are no new material averments that call for revisiting Saunders J’s views in respect of Plaintiff’s case, and his conclusion that the Plaintiff had a strong arguable case or one that could well succeed at trial goes much beyond the usual threshold of a good arguable case for an interlocutory injunction.
41. Mr Chang submitted and I agree that the court should also consider the 1st and 3rd Emails and the 2nd Document, especially when the 1st and 2nd Defendants do not dispute they sent/executed the same. Such documents on their face show that the 1st Defendant was apologetic for his actions, which hang well with the Plaintiff’s case of misappropriation by the 1st Defendant, but which does not sit comfortably with the 1st Defendant’s case of uncertainty and doubt as to whether any money is owed to the Plaintiff and indeed even of suspected overpayment to the Plaintiff. The 1st Defendant contends that he was apologising for the fact that the partnership had no money due to high overheads and lack of orders. But even on his case, I see no particular reason why he should apologise to his partner involved in the same business venture (ie the Plaintiff) for commercial downturn not due to his default, and indeed any lack of orders might arguably be the Plaintiff’s default. Further, on the face of the 1st and 3rd Emails and the 2nd Document they also do not appear to be qualified by the proviso suggested by the 1st Defendant that the assurance of payment to the Plaintiff depends on the Plaintiff being able to establish that monies were due to him. Still further, the transfer of ownership of the Policy effected in the very month after the 1st Email also sits well with the Plaintiff’s case.
42. In the circumstances, although I respectfully adopt the views of Saunders J in respect of the Plaintiff’s case, I have also come to the view that the Plaintiff’s case has a demonstrably high probability of success on my own evaluation.
VI. 1st Defendant’s counterclaim
43. The 1st Defendant raised a counterclaim against the Plaintiff on essentially 2 grounds. First, on 21 November 2008 the 1st Defendant gave notice to the Plaintiff to dissolve their partnership with immediate effect, and asked for an order that such partnership be wound up and all necessary accounts and enquiries be taken and made upon which the Plaintiff shall pay the amount to the 1st Defendant. Secondly, the 1st Defendant adopted all the averments in his Defence and sought an order that upon taking the aforesaid accounts and enquiries the Plaintiff shall answer personally to him for all amounts due to him for breach of fiduciary duty and/or trust, constructive trust and/or money had and received as a result of the Plaintiff’s misappropriation and use of part of his share of the partnership profits, and a further order for damages for breach of the partnership agreement.
44. Mr Chang submitted that security for costs ought not be imposed where, as in the present case, there were a claim and a counterclaim raising essentially the same issues. He referred to BJ Crabtree (Insulation) Limited v GPT Communication Systems Ltd (1990) 59 BLR 43 where Bingham LJ (as he then was) said as follows at pp.52-53:
“It is, however, necessary, as I think, to consider what the effect of an order for security in this case would be if security were not given. It would have the effect, as the defendants acknowledge, of preventing the plaintiffs pursuing their claim. It would, however, leave the defendants free to pursue their counterclaim. The plaintiffs could then defend themselves against the counterclaim although their own claim was stayed. It seems quite clear and, indeed, was not I think in controversy – that in the course of defending the counterclaim all the same matters would be canvassed as would be canvassed if the plaintiffs were to pursue their claim, but on that basis they would defend the claim and advance their own in a somewhat hobbled manner, and would be conducting the litigation (to change the metaphor) with one hand tied behind their back. I have to say that that does not appeal to me on the facts of this case as a just or attractive way to oblige a party to conduct its litigation.
……
One comes back, I think, at the end of the day to the reflection that [section 726 of the Companies Act, equivalent to s.357 of the Companies Ordinance] is a rule intended to give a measure of protection to a defendant who is put to the cost of defending himself against a claim made by an impecunious corporate plaintiff. It may in some cases be fair and just to make such an order even though the defendant is himself counterclaiming, but I am persuaded that it would be wrong to do so here because the costs that these defendants are incurring to defend themselves may equally, and perhaps more preferably, be regarded as costs necessary to prosecute their counterclaim. …… The fact that the plaintiffs are plaintiff and the defendants are counterclaiming defendants instead of the other way round appears on the facts here to be very largely a matter of chance. ……”
45. At page 54, Bingham LJ said that the factor which seemed most important to him was “the fact that these two claims – the claim by the plaintiffs and the cross-claim by the defendants – raise essentially the same issues and are going to be fully litigated anyway so far as one can tell”.
46. Parker LJ (as he than was) at p.55 noted as follows:
“Here, the situation is that, if the money is not paid into court and the plaintiff’s claim is therefore stayed, the defendant will still raise issues on the counterclaim which are precisely the same as the issues which he would raise on the claim. In the result, findings might be made on the counterclaim which clearly showed that the plaintiff’s claim which had been stayed would be lifted and there would then be judgment for the plaintiff on the claim (notwithstanding the fact that he had not paid money into court) with appropriate orders as to costs. This being the situation, it appears to me that the only effect of the application for security will be that, if the money is not paid in, the defendant has the right to begin rather than the plaintiff. That seems to me to be nothing less than the use of the rule to obtain some tactical advantage rather than to obtain protection.”
47. In Success Wise Ltd v Dynamic (BVI) Ltd [2006] 1 HKC 149, 154, Recorder Yu SC applied BJ Crabtree and referred to the dictum of Parker LJ as irrefutable logic. The learned judgeexplained the principle in terms of whether the counterclaimant could be regarded in substance as an “attacker”, which term was adopted by Ma J (as he then was) in Brand Farrar Buxbaum LLP v Samuel Rozenbaum Diamond Ltd [2003] 1 HKLRD 600. “If he is as much an ‘attacker’ as the plaintiff and it is merely fortuitous who started proceedings first, it would be a factor which should point the court towards treating both claimant and counterclaimant in the same way as far as security is concerned” (pp.155-156).
48. Mr Hart argued that the Plaintiff’s claim and the 1st Defendant’s counterclaim covered different factual matrix. He cited as example the issue over the Policy (see paragraph 36 above). Yet the 1st Defendant’s purpose for transferring the ownership of the Policy to the Plaintiff and his wife and the propriety of the Plaintiff’s encashment of the Policy are also the subject matter of the Plaintiff’s claim against the 1st Defendant.
49. Mr Hart next argued that the Plaintiff was the “attacker” because it was the Plaintiff who first commenced legal proceedings and sought the initial ex parte and later Mareva injunction against the 1st and 2nd Defendants. However, I am not persuaded by such argument. The purpose of the injunction was for preservation of the status quo pending trial of the underlying disputes. The relevant consideration for the present application is not who first took action by issuing the application for such injunction, but whether the subject matter of the underlying claim and counterclaim overlap to the extent that it cannot be said that the Plaintiff is the “attacker”. If so, then it matters not who started proceedings first as far as security for costs is concerned.
50. I agree with Mr Chang that the Plaintiff’s claim and the 1st Defendant’s counterclaim involve the same or substantially the same factual matrix. I particularly note that the 1st Defendant wholly adopts the averments in his Defence as the material facts for his counterclaim. It was on such pleas that the 1st Defendant applies for an order for accounts and enquiries following dissolution of the partnership between him and the Plaintiff, which relief is similarly sought by the Plaintiff in his claim. Further, the 1st Defendant by his counterclaim puts in issue the amount of the partnership profits, who has control of the partnership assets, and who has misappropriated and used the other partner’s share of the partnership profits, and the relevant circumstances, scope and consequences of such misappropriation and use. In short, the Plaintiff and the 1st Defendant disagree over what constitutes partnership profits, and they point fingers at each other for having misappropriated and used the other partner’s share of the partnership profits, thus resulting in mirror claims based on constructive trust, breach of fiduciary duty or trust, and money had and received.
51. Turning to the 2nd Defendant, she has not raised any counterclaim in the present action. Mr Chang argued that the principles in BJ Crabtree and Success Wise Ltd could be extended to her because it did not appear that she would incur separate costs over and above the costs that would be incurred by the 1st Defendant in respect of his counterclaim.
52. But the 2nd Defendant was not a partner to the partnership business between the Plaintiff and the 1st Defendant, and the Plaintiff’s causes of action against her included knowing receipt which is unique unto her and secondary to the Plaintiff’s claim against the 1st Defendant as the alleged primary culprit who misappropriated the Plaintiff’s share of the partnership profits. Even though the 1st and 2nd Defendants may rely on similar factual background, the 2nd Defendant’s cause of defence and consequent legal arguments may well be different, and they go strictly to her defence rather than to any independent counterclaim.
53. Mr Chang conceded that had the 1st and 2nd Defendants retained different set of lawyers, his arguments based on the principles in BJ Crabtree and Success Wide Ltd of themselves would not have prevented the 2nd Defendant from securing security for costs for defending the Plaintiff’s claim against her.
54. Here, Mr Hart’s firm acts for both the 1st and 2nd Defendants, and prima facie they are respectively responsible for legal costs incurred and to be incurred in defending the Plaintiff’s claim against each of them and additionally in the case of the 1st Defendant in prosecuting his counterclaim against the Plaintiff. Whilst there may be possible savings in legal costs for both Defendants as a result of their running similar defences, there is nothing before me to suggest that the 1st Defendant will be obliged to bear all of the relevant legal costs for such overlap to the exclusion of 2nd Defendant. It also does not logically follow that if the 1st Defendant has to incur some costs in running his counterclaim the 2nd Defendant will not have to pay legal costs for running her defence that relies on similar factual matrix as for the 1st Defendant’s counterclaim. Entitlement to security for costs should not depend on the fortuity of whether co-defendants retain different sets of lawyers or not. In any event, should the 1st and 2nd Defendants succeed at trial and be awarded costs of the action, such order will not limit the 2nd Defendant’s recoverable costs to costs over and above those incurred by the 1st Defendant only. In the circumstances, I would not have declined to award security for costs in favour of the 2nd Defendant (had I been minded to do so) by reason of the 1st Defendant’s counterclaim.
VII. Difficulties in enforcement
55. Mr Chang submitted that the modern approach to an application for security for costs was not to focus on the status of the plaintiff as a foreign plaintiff, but on the potential difficulties faced in enforcing any costs order overseas. He referred to Izumo Mokko Co Ltd v TS Lines Ltd [2007] 2 HKLRD 363 and Nassar v United Bank of Kuwait [202] 1 WLR 1868 in support of such proposition.
56. Since the Plaintiff is ordinarily resident in the United States and there is no evidence before me that he has any assets within the jurisdiction, it is plain that any costs order that may be granted against the Plaintiff in favour of the 1st and 2nd Defendants will have to be enforced in the United States. There is no dispute that the United States has a common law system, but has no reciprocal arrangement or legislation for enforcement of judgments or orders with Hong Kong.
57. Mr Chang argued that the mere absence of reciprocal arrangement or legislation for the enforcement of judgments or orders between Hong Kong and the United States could not of itself justify an inference that enforcement would not be possible. He went on to submit on the strength of Izumo Mokko Co Ltd and Nassar that since the 1st and 2nd Defendants failed to adduce evidence of any added obstacle beyond time and costs that would necessarily be incurred for any enforcement of a local costs order in the United States, there was no objectively justifiable or proper basis for concluding that such obstacles did exist.
58. At the hearing, I have referred the parties to the case of Yang Wei Jennifer & anor v HSBC Private Trustee (Hong Kong) Limited HCA5073/2001 and HCAP11/2002 (unreported, 24 December 2008) where Chu J considered Izumo Mokko Co Ltd and Nassar in the context of an application for security for costs against inter alia a foreign plaintiff residing in the United States. Chu J said as follows:
“18. While not disputing that the USA has a common law system, Mr Miu submits, and I agree, that there is no reciprocal enforcement of judgments between Hong Kong and the USA under the Foreign Judgments (Reciprocal Enforcement) Ordinance, Cap.319. It is necessary for a successful party to institute proceedings in the USA to enforce a Hong Kong judgment or order on costs. What Mance LJ had said in the Nasser case is that if the plaintiff resides in a common law country where there is legislation enabling reciprocal enforcement of judgment by registration, it may be incumbent upon an applicant to show some basis for concluding that enforcement would face substantial obstacle or extra burden meriting the protection of an order for security for costs. This clearly has no application to the present case given that there is no legislative arrangement for reciprocal enforcement of judgments between Hong Kong and the USA.
19. Although there is no evidence relating to additional difficulties or complications in enforcement of a Hong Kong judgment or order on costs in the USA, I can readily see that there will naturally be some delay and additional costs if the defendant has to enforce a judgment or order on costs against the plaintiff in the USA.”
59. I also came to a similar same view half a year earlier in Condumex Inc v Starasia Components Limited DCCJ6287/205 (unreported, 9 August 2007) at paras.79-80 again in the context of an application for security for costs against inter alia a foreign plaintiff in the United States.
60. In the circumstances, I do not agree that the absence of affirmation evidence from the 1st and 2nd Defendants as to the difficulties in the enforcement of local costs orders in the United States obviates the need to provide security had I otherwise been minded to so order.
VIII. Amount of security
61. Turning finally to the amount if security for costs were to be provided (which I disagree), the 1st and 2nd Defendants asked for security for costs on party and party basis in the sum of HK$766,767.00. Mr Chang reminded (and I agree) that the Plaintiff would only be entitled to sufficient (and not complete) security that would be just in all the circumstances, and not necessarily on full indemnity basis (see Hong Kong Civil Procedure 2010 Vol.1 para.23/3/32 at p.505).
62. The solicitors for the 1st and 2nd Defendants prepared a cost estimate (“Estimate”), which the Plaintiff challenged on the following 3 grounds:
(a) As evident from the objections raised by solicitors for the Plaintiff (“Objections”), the Estimate was excessive and should be reduced to HK$206,767.00.
(b) The history of the present action, including the 1st and 2nd Defendants’ application for legal aid on 31 December 2008 (which was refused on 3 February 2009), their application for release of monies ring-fenced by the injunction for legal expenses on 10 February 2009 on the ground of insufficient funds and difficulties in borrowing money from family and friends (which was refused on 20 March 2009), and their engagement of solicitors shortly thereafter with Notice to Act filed on 2 April 2009, cast serious doubt on the 1st and 2nd Defendants’ assertion that they had incurred and would incur substantial legal costs (including costs of engaging senior counsel) as set out in the Estimate.
(c) The Fortification in the sum of HK$200,000.00 should be taken into account in determining what sum would amount to sufficient security. When the court directed the Plaintiff to put up the Fortification, the 1st and 2nd Defendants were unable to identify any loss save for legal costs, and it was also on this basis that Saunders J refused their request for further fortification. Thus, it was said that the Fortification would serve as sufficient safeguard for the 1st and 2nd Defendants’ legal costs and expenses in the event that the Plaintiff lost his claim at trial.
63. On the other hand, Mr Hart referred me to the parties’ respective statement of costs for summary assessment in respect of the present application filed pursuant to Practice Direction 14.5 on the basis that the substantive hearing for argument was fixed for 1 hour. The Plaintiff’s estimate amounts to HK$121,995.00 and that of the 1st and 2nd Defendants amounts to HK$88,813.00. Mr Hart argued that by using these estimates as a reference, the 1st and 2nd Defendants’ request for security for costs in the sum of HK$766,767.00 up to the stage of PTR was not unreasonable.
64. Taking a broad brush approach, had I been minded to order security for costs, I would have considered a sum of HK$450,000.00 to be appropriate. In doing so, I make the following observations:
(a) Mr Hart informed me that the Plaintiff has not engaged counsel to date. In my view, given the seniority and experience of Mr Hart who is featured in the Estimate as the handling solicitor of the case and further given the progress of discovery to date, it does not appear that counsel’s involvement in relation to discovery will be substantial.
(b) In respect of the proposal to engage senior counsel, Mr Hart submitted there should be provision for such costs because the serious allegations against the 1st Defendant’s commercial reputation and integrity as a businessmanarguably justified engaging senior counsel, but he also frankly appreciated that success at trial by the 1st and 2nd Defendants might not necessarily lead to recovery of senior counsel’s fees. Nevertheless, Mr Hart reminded that the Estimate did not propose two counsel, and he had in mind a particular senior counsel with whom he had worked together for many years and whom he believed would be good in cross-examining the Plaintiff’s witness(es). However, having carefully considered the pleadings, affidavits/affirmations and Lists of Documents before the court, I am persuaded that the estimated fees for a reasonably senior junior counsel would constitute sufficient security.
(c) I am not convinced by the Plaintiff’s contention that any costs for perusing the Writ of Summons and for taking instructions from the 1st and 2nd Defendants on the background of the dispute should be entirely discounted on the basis that (i) they overlapped with work done for and hence costs of the injunction proceedings which the 1st and 2nd Defendants could not recover under the costs order by Saunders J and (ii) they were work done before the 1st and 2nd Defendants’ change of solicitors. Notwithstanding the 1st and 2nd Defendants’ change of solicitors and the injunction proceedings, I cannot see how the Plaintiff can reasonably contend the 1st and 2nd Defendants will not be entitled to any of such costs if they succeed at trial and are awarded costs of the action. It will be strange indeed if in those circumstances they will not be able to recover even the costs of perusing the Writ of Summons and/or taking instructions as to the background facts which plainly must be material to running a successful defence.
(d) I agree that the order by Saunders J for speedy trial envisages that the case will proceed to PTR right after exchange of witness statements, and the post -CJR procedural steps such as Case Management Summons/Conference and Timetabling/Listing Questionnaires and their relevant costs are therefore obviated.
65. However, I am not convinced the Fortification should be taken into account for security for costs had I been minded to order security to be provided. Although Saunders J declined to increase the Fortification, I do not agree that the Fortification itself is earmarked for the purpose of safeguarding the 1st and 2nd Defendants’ costs of the action as suggested by Mr Chang. After all, the Plaintiff is a foreign plaintiff with no known assets in Hong Kong, and that must have weighed with the court when the Plaintiff was directed to provide the Fortification. Further, I cannot ignore the fact that the Fortification is for the cross-undertaking as to damages that may arise as a result of having the interlocutory injunction in place until trial, which is still some time away since witness statements have not yet been exchanged. In the circumstances, it is inappropriate to take the Fortification for damages into account even if security for costs were to be awarded.
66. As regards the argument in paragraph 64(c) above, it comes perilously close to doubting whether there has been or will be compliance with the indemnity principle in rendering the Estimate as seen from the Plaintiff’s challenge to the 1st and 2nd Defendants’ financial ability to engage solicitors and in due course senior counsel in the context of their claimed inability to raise funds for legal representation in February/March 2009. Such argument is not featured in Mr Chang’s oral submissions, but it has not been abandoned. In my view, this is a serious allegation and as such requires clear and cogent prima facie support, but at present it is nothing more than surmise and I am not convinced I should go down the route of investigating the 1st and 2nd Defendants’ source of funds for current and future legal representation.
XI. Conclusion
67. In light of the above analysis, I have dismissed the Amended Summons at the hearing. I have also added at the hearing that had I considered it necessary for the Plaintiff to provide security for costs, I would not have stayed the proceedings pending provision of such security. There is an order for speedy trial, and the present action should progress swiftly in line with the tight timetable set by Saunders J. The parties are expected to diligently get on with witness statements and proceed to PTR with due expedition.
X. Costs
68. There is no reason why costs should not follow event, and Mr Hart did not oppose certificate for counsel for the Plaintiff. As explained above, the Plaintiff has submitted a statement of costs in the total sum of HK$121,995.00 for summary assessment.
69. Mr Hart did not object to the fee earners’ charge out rates and counsel’s brief fee in the Plaintiff’s statement of costs. However, he regarded solicitors’ profit costs as claimed for time spent on communicating with the Plaintiff, with the solicitors for the 1st and 2nd Defendants and with counsel and on professional work done excessive.
70. I remind myself that for summary assessment of costs the court adopts a broad brush approach and will not conduct a min-taxation. I bear in mind that for the purpose of the present application the handling solicitor for the Plaintiff is already well versed in the background facts since he himself has made various affidavits that set out the Plaintiff’s case for the injunction proceedings. The Plaintiff’s solicitors must also have been familiar with the nature of the 1st and 2nd Defendants’ case as revealed inthe pleadings and in the affirmations filed for the earlier injunction proceedings. No substantial new facts have been raised in the affidavits in opposition for the present application. Further, I am not persuaded that counsel requires 2 hours to peruse and comment on the 1st and 2nd Defendants’ skeleton bill of costs for the application for security for costs. All of the above matters are relevant to determining what the necessary and proper party and party costs for the present application should be.
71. In all the circumstances, I assess the Plaintiff’s costs of the present application to be HK$93,000.00. Thus, at the hearing I ordered the 1st and 2nd Defendants to pay costs of the present application to the Plaintiff, including all costs reserved if any and certificate for counsel, summarily assessed at HK$93,000.00.
(Marlene Ng)
Mr Jonathan Chang instructed by Messrs Chan Lau & Wai for the Plaintiff.
Mr Andrew Hart of Messrs Blank Rome for the 1st and 2nd Defendants.