DYNAMIC CREATIONS LTD v. MINT GEM & JEWELRY MANUFACTURING CO LTD

HCA378/2006

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 378 OF 2006

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REASONS FOR DECISION

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1.  At the hearing on 31 March 2006, I dismissed two summonses issued by the defendant.  I now reduce the reasons into writing.

2.  The first of the summonses was dated 3 March 2006 and amended on 17 March 2006.  It seeks a variation of the Order made on 24 February 2006.  The second summons dated 14 March 2006 is an application to expunge paragraphs 10 and 11 of the Affidavit of Yat Sum Rita Lau dated 10 March 2006 filed on behalf of the plaintiff.

3.  For the purpose of dealing with the applications, it is necessary to understand the dealings between the parties and the events leading to the applications and the developments up to the substantive hearing. 

Background

4. The background leading to these applications can be briefly stated as follows.

5. By agreement between the parties, the defendant was to manufacture and assemble jewellery for the plaintiff in the Mainland.  For the purpose of the manufacture and assembly work, the plaintiff had provided to the defendant various silver master models, rubber and metal moulds, raw materials that include gold and gemstones and also gold and silver accessories.  The defendant had also produced some silver master models and other moulds from designs supplied by the plaintiff.  There is no dispute that these models and moulds remain the properties of the plaintiff.

6. Dispute arose between the parties in January this year, after the plaintiff discovered acts of impropriety committed by its managing director, Noel Chan.  It is the plaintiff’s case that Noel Chan had concealed her interest in a company called Kong Elegant Limited. This company is the majority shareholder of the defendant and is also in direct competition with the plaintiff.  

7. As a result of this, the plaintiff stopped the payment to the defendant under a cheque in the amount of $1,075,741.65. This led the defendant to institute High Court Action No.123/2006 on 18 January 2006 to recover the amount.  The action was settled on 27 January 2006 by the plaintiff paying the amount claimed with costs.

8. At the same time, there were a number of correspondences between the plaintiff’ solicitors and the defendant’s former solicitors over the return and delivery up by the defendant of the plaintiff’s models, moulds and raw materials and other properties that were in the defendant’s factory in the Mainland.  The defendant resisted the plaintiff’s request on the single basis that it exercised a lien over all these properties.  By letter dated 10 February 2006, the plaintiff offered to pay into court $1.5 million as security for the defendant’s claim so as to secure the return of the properties. The defendant, in response, demanded the payment of some $3.6 million to cover, among other things, its loss of profits and damages, before it would release the properties to the plaintiff. 

Events leading to the 24 February 2004 Order

9. Eventually on 21 February 2006, the plaintiff commenced these proceedings claiming for the delivery up of the properties over which the defendant has asserted a lien.  The properties as particularized in paragraph 7 of the Statement of Claim (collectively referred to as “the Properties”) comprise:

(a)    18,383.62 grams of gold

(b)    13,359 pieces of gemstones

(c)    10,029 pieces of silver master models

(d)    15,897 pieces of rubber moulds

(e)    224 pieces of metal moulds

(f)    Approximately 13,800 pieces of finished products and work-in-progress

(g)    16 sets of computers with LCD monitors

(h)    7 pieces of “Matrix” keys for operating a special computer programme

(i)    1 set of carve machinery

(j)    3 safes containing documents, gemstones and diamond samples

(k)    2 boxes of silver accessories

(l)    200 chops/ stamps

(m)  Other documents, equipment and tools.

10. On the same day, the plaintiff issued a summons returnable on 24 February 2006, the Summons day, applying under Order 29 rule 6 of Rules of the High Court for leave to procure a sum of $1.2 million be paid into court as security for the defendant’s disputed claim of lien and for the delivery up of the Properties.    

11. The plaintiff and the defendant appeared by counsel at the hearing on 24 February 2006.  Counsel for the defendant at the outset, while indicated there was insufficient time to put in evidence to deal with the application, stated that the defendant was agreeable to the release of those properties that were in its possession, subject to payment of its claim of some $3.6 million.  It was said that the dispute was really the amount to be paid into court.  Eventually, the parties agreed that the amount should be increased to $1.5 million and that the money was to be provided by the plaintiff’s parent company, Abbeycrest PLC.  On this basis, the defendant indicated through counsel that it would release and deliver up such of the Properties that were in its possession, custody and power.

12. Through its counsel, the defendant then pointed out that in respect of items (a), (b) and (f) of the Properties, there might be custom and other regulatory procedures and requirements, which could delay the delivery up of them.  However, at no time had the defendant, through counsel, indicated that there would be legal restrictions or prohibitions or problems affecting the delivery up of other items.  In particular, there was no suggestion that it was beyond the defendant’s means or was contrary to the PRC law to export silver master models and rubber and metal moulds to Hong Kong for delivery up to the plaintiff.

13. It was in these circumstances that the Order of 24 February 2006 was made.  Paragraphs 4, 5 and 7 of the Order, which are relevant to the application for variation, provide as follows:

“4. Within 7 days from the receipt of the Notice of Payment into Court, the Defendant shall deliver up to the Plaintiff’s registered office in Hong Kong the items under paragraph 7(c) - (e) and (g) - (m) of the Statement of Claim.

5. The Defendant shall deliver up to the Plaintiff in the Mainland the items under (a) and (b) and the unfinished products under (f) of paragraph 7 of the Statement of Claim in a manner to be agreed between the parties.

7. In the event there are disputes as to compliance with paragraphs (4), (5) and (6) above, there be liberty to apply to the court and if necessary, on urgent basis.”

14. On 25 February 2006, Abbeycrest PLC paid into court $1.5 million.

The defendant’s applications to vary the 24 February 2006 Order

(1) The first summons dated 3 March 2006

15. On 3 March 2006, the defendant issued the first summons to vary the Order by deleting paragraph 4 and varying paragraph 5 of the Order to the effect that items (a) and (b) and the unfinished products under item (f) of the Properties would be delivered in Hong Kong within 4 weeks.

16. In the Affirmation of Lam Ko Yeung Raymond leading the application, the variation to paragraph 5 was explained on the basis that delivery of the gold, gemstones and unfinished products under items (a), (b) and (f) to the plaintiff in the Mainland was illegal, but it was possible to deliver them in Hong Kong and more time was required to accomplish it. 

17. The affirmation further indicated that items (c) - (e) and (g) – (m) of the Properties were not in the defendant’s possession.  It was said that the silver master models, rubber and metal moulds (i.e. items (c) to (e) of the Properties) had all been returned to the plaintiff’s staff and kept in a locked factory unit inside the defendant’s factory, which was leased by the defendant to the plaintiff. 

18. As for items (g) – (i) and (m), the affirmation also said that delivery of these items to Hong Kong was not allowed and considered as an illegal activity under the PRC customs law “due to without possessing right thereto nor any proof of purchasing invoices, under name of the defendant, of those items”.  On this basis, the defendant sought the deletion of paragraph 4 of the Order.

(2) The summons dated 14 March 2006

19. Then on 14 March 2006, two days before the hearing of the defendant’s summons, the defendant issued another summons to amend the summons for variation.  The amendment was allowed at the hearing unopposed.  By the amended summons, the defendant applies to substitute paragraphs 4 and 5 of the Order with five directions or orders.  For the purpose of this hearing, only b., c. and e. remain relevant. They provide as follows:

“b. The agents or servants of the Plaintiff (whose identity shall be provided and confirmed 24 hours in advance by Messrs Johnson Stoles and Master to Messrs Anthony Siu & Co) be at liberty to enter the factory of the defendant at Shunde for the purpose of removing therefrom the items of goods mentioned in Paragraph 7(c)-(e) and (g)-(m) of the Statement of Claim which the Plaintiff claims to be kept inside therein provided the items of goods to be removed should, before being removed, be properly checked and recorded and/or witnessed by a surveyor to be nominated by the parties and approved by the Court as hereinbelow provided;

c. The aforesaid surveyor shall be jointly appointed by both parties and the expenses shall be borne by the parties in equal share;

e. That there be a payment out of the two sums, namely, $418,473.38 and $165,493.85 out of the money paid into court by the Plaintiff.”

20. In the second affirmation of Raymond Lam in support of the amended summons, the defendant raised for the first time that there would be legal impediments to the export of silver master models, rubber and metal moulds and silver accessories (i.e. items (c)-(e) and (k)) to Hong Kong for delivery up to the plaintiff.  The affirmation reiterated that in any event, these items had been packed away and kept in the factory unit that was locked, hence were not in the defendant’s possession.   The affirmation, however, accepted that the defendant retained a key to the factory unit, which it said was to facilitate spot checks carried out by the customs and excise officials of the Mainland. 

The defendant’s application for expunging without prejudice communication

21. Also on 14 March 2006, the defendant issued the summons for expunging paragraphs 10 and 11 of the Affidavit of Yat Sum Rita Lau and the exhibit thereto, on the basis that they contained privileged materials, namely, the letter dated 6 March 2006 from the defendant’s solicitors marked “without prejudice”.

Events after the 16 March 2006 hearing

22. At the hearing on 16 March 2006, the amended summons and the other summons to expunge part of the affidavit were adjourned for argument.  The plaintiff, however, agreed in principle for items (a), (b) and the unfinished products under item (c) of the Properties to be delivered in Hong Kong. That disposed of the need to vary paragraph 5 of the 24 February 2006 Order. 

23. The parties also agreed to carry out a joint inspection of the factory unit in the meantime for the purpose of making an inventory of the properties there.  The inspection was carried out in the presence of the parties’ respective surveyors.  A checklist of properties signed by both surveyors on 17 March 2006 and the defendant’s surveyor report dated 23 March 2006 containing the detailed inventory together with photographs of the properties were available at the adjourned hearing.

24. It appears from the correspondence exchanged between the parties’ respective solicitors after the inspection that some of the rubber moulds and all the metal moulds (i.e. items (d) and (e) of the Properties) and some of the computers, machinery, tools and equipment under items (g) - (m) of the Properties were located not inside the factory unit, but in other areas in the defendant’s factory.   The internal components of the metal moulds were found to have been removed, which the defendant explained was for routine maintenance checking and repair.  The plaintiff further asserted that the hard disks and/or software of two of the computers kept inside the factory unit had been removed.  The defendant denied knowledge of or being responsible for it.  

25. Having dealt with the relevant background of and developments in the case, I now turn to deal with the specific applications of the defendant.

The letter dated 6 March 2006

26. I will deal firstly with the application to expunge paragraphs 10 and 11 of the Affidavit of Rita Lau and the exhibit thereto, being the letter from the defendant’s solicitors dated 6 March 2006 marked “without prejudice” (“the Letter”).

27. It is not in dispute that the rule excluding without prejudice communication from being admitted as evidence is subject to exceptions, as identified by Walker LJ in Unilever v. Procter & Gamble Co [2000] 1 WLR 2436 at 2444.  For the present purpose, the relevant exception is where the exclusion of the evidence “would act as a cloak for perjury, blackmail or other unambiguous impropriety”.  Counsel are also in agreement that the exception should only be applied in clear cases of abuse of a privileged occasion.  

28. In the present case, the purpose of the reference to the Letter and its contents is to address the defendant’s then position, as stated in open correspondence and on affirmation, that the silver master models and rubber and metal moulds were not in its possession. Paragraphs 3 and 4 of the Letter are of particular relevance. They state as follows:

“3. Our client is willing and will try its best endeavour to help your client regain all the items under paragraph 7 of the Statement of Claim. Our client believes that should your client stop pursuing this matter in a hostile manner, your client could recover the said items including the silver master models and the raw materials very soon. If our respective clients are able to reach a full and final settlement of this matter, our client is willing to explore all possible ways to deliver up all the said items to your client’s Hong Kong office as soon as possible.

4. After recovery of all the aforesaid items by your client, the next issue will be the quantum of our client’s claim against your client including but not limited to the loss and damages suffered by our client due to your client’s breach of the relevant Agreement and other outstanding and/or unsettled items. With a view to settle this matter amicably and in order to save time and costs, our client is prepared to accept a sum of not more than $1,200,000 (details of which will be provided to you soon) in full and final settlement of all these matters.  Each party shall bear its own costs.  The settlement sum shall be paid to our client upon the receipt of the aforesaid silver master models and raw materials.  Thereafter, the parties shall waive its claims against each other, if any.”    

29. The Letter indicated that the defendant was in a position to enable the plaintiff to regain all the items under paragraph 7 of the Statement of Claim, including silver master models and raw materials.    The defendant was also offering to assist the plaintiff to have the items delivered to Hong Kong.  The Letter went on to state, too, that upon a settlement and upon the plaintiff’s willingness to pay a settlement sum of not more than $1.2 million, the silver master models and raw materials could be returned to the plaintiff, presumably in Hong Kong.

30. The defendant’s position under the Letter is in stark contrast to its statement under oath that it did not have in its possession the silver master models and rubber and metal moulds that necessitated the summons dated 3 March 2006 to, inter alia, delete paragraph 4 of the 24 February 2006 Order.  It is to be noted that the Letter was written only 3 days after the defendant filed the Affirmation of Raymond Lam (including a Sunday).  Additionally, the letter was preceded by an open letter from the defendant’s solicitors sent on the same day.  In it, it was said that the defendant believed most if not all the items under (c)-(e) and (g)-(m) were kept in the factory unit and it might not be appropriate or sensible to break the locks without the presence of the plaintiff’s representative.  As subsequent events reveal, the rubber and metal moulds and some other equipment and tools were within the defendant’s possession and power to deliver up, as stated in the Letter.

31. What is more revealing and important about the Letter is its underlying tone.  The defendant was saying that the plaintiff could have all its properties back, and delivered to Hong Kong, if it did not press the action further and agreed to pay a proposed settlement sum of not more than $1.2 million, but with details of the calculation to be supplied later.  As Mr Yin submitted, paragraphs 3 and 4 of the Letter read together, and read against the background of the case, represent a “carrot and stick” to pressurize the plaintiff into settlement. 

32. In my view, this is a clear instance of an abuse of the “without prejudice” privilege, such that the general rule against admitting without prejudice communication into evidence is displaced.  For this reason, the defendant’s summons dated 14 March 2006 for expunging part of the plaintiff’s affidavit evidence is dismissed.

Payment out application

33. I turn next to deal with the application for payment out of two sums of money.  The first sum was the price of goods delivered to the plaintiff before this action. The second sum was the price of the jewellery delivered to the plaintiff in consequence of the 24 February 2006 Order.  The defendant said it was unjust to allow the plaintiff to get the goods without paying for them. 

34. In Mr Yin’s submission, this application is misconceived because the $1.5 million paid into court was pursuant to Order 29, rule 6 of Rules of the High Court, which enables a sum to be paid into court as security for a disputed claim of lien.  The rule reads as follows:

“Where the plaintiff, or the defendant by way of counterclaim, claims the recovery of specific property (other than land) and the party from whom recovery is sought does not dispute the title of the party making the claim but claims to be entitled to retain the property by virtue of a lien or otherwise as security for any sum of money, the Court, at any time after the claim to be so entitled appears from the pleadings (if any) or by affidavit or otherwise to its satisfaction, may order that the party seeking to recover the property be at liberty to pay into court, to abide the event of the action, the amount of money in respect of which the security is claimed and such further sum (if any) for interest and costs as the Court may direct and that, upon such payment being made, the property claimed be given up to the party claiming it.”

35. Mr Hung, on the other hand, argued that Order 29 rule 6 has no application because the $1.5 million was not paid in by the plaintiff, but by its parent company Abbeycrest PLC.  He said that the payment in should be seen as made pursuant to Order 29, rule 2.

36. I cannot agree with this submission.  Order 29 rule 2 is clearly dealing with an order for the detention, custody and preservation of the subject matter of litigation as well as the inspection of it. The plaintiff’s summons dated 21 February 2006 was made under Order 29 rule 6.  The affidavit leading the application also indicated in no uncertain terms that this was the basis on which the application was made.  At the hearing on 24 February 2006, it was agreed and accepted by the defendant, acting through counsel, that the money was to be paid by the parent company because the plaintiff was subject to a winding-up petition.

37. There is also no doubt that the money paid into court was understood and was intended to stand as security to overreach the disputed lien asserted by the defendant.  This fact can be seen not only from the transcript of the 24 February 2006 hearing, but also from the terms of the Order itself.  In these circumstances, it is not open to the Court to order  payment out to meet the price of the goods delivered to the plaintiff, especially in respect of delivery made in compliance with the Order.

38. The application for payment out must be dismissed.

Variation of the 24 February 2006 Order

39. I turn finally to deal with the application to vary the 24 February 2006 Order.  At the hearing on 31 March 2006, it was understood and agreed that the application only concerned the 24 items set out in the defendant’s surveyor’s report.  Without conceding the application for variation, the plaintiff through Mr Yin indicated that it would not press for exports from the Mainland or delivery in Hong Kong of items (g)-(i), (l) and (m) of the Properties as well as item (j) insofar as it relates to the three safes and the documents contained in one of them.

40. The crux of the dispute is therefore confined to items (c) – (e), being the silver master models, rubber and metal moulds, and also item (k), the two boxes of silver accessories.  There are also the gemstones and diamond samples in two of the safes. 

41. In substance, the defendant seeks to vary the place of delivery up to the Mainland instead of the plaintiff’s registered office in Hong Kong.  The defendant’s case is that the variation is necessary because it is impossible to export the silver master models and the silver accessories, without infringing the PRC law.  As for the rubber and metal moulds and the other items, the defendant says that because it is not the owner of them and does not have the necessary documentation for export and custom clearance purposes, it is not practicable to effect delivery in Hong Kong.  It is said that there would be cumbersome procedures and involve possibly payment of Value Added Tax, which make delivery in Hong Kong all the more impracticable.

42.  The 24 February 2006 Order is an interlocutory order.  Although not worded as a consent order and therefore may not have the effect of a binding contract, it is an order made following an inter-partes hearing when both sides were legally represented and had an opportunity to address the court.  As the transcript of the hearing shows, both sides had full opportunities to bring to the court’s attention the considerations and possible problems that should be taken into account in deciding the terms of the order to be made.  Indeed as the hearing progressed, the Order ultimately announced by the court was not really controversial.  The defendant therefore is not entitled as of right to vary the Order or to re-argue the plaintiff’s application as if it was a re-hearing. 

43. On the contrary, the situation is as held by Buckley LJ in Chanel Ltd v. F.W. Woolworth & Co Ltd [1981] 1 WLR 485 at 492:

“Even in interlocutory matters a party cannot fight over again a battle which has already been fought unless there has been some significant change of circumstances, or the party has become aware of facts which he could not have reasonably have known, or found out, in time for the first encounter.  The fact that he capitulated at the first encounter cannot improve a party’s position.”

44.  The burden is therefore on the defendant to show either there has been some significant change of circumstances or it has become aware of facts that it could not have reasonably found out in time for the first hearing such that the court is justified in revisiting the interlocutory order.

45.  In the present case, the defendant appears to suggest that it did not appreciate the legal impediments and the impracticalities surrounding the delivery up of the Properties, including the models, moulds and silver accessories until after the hearing on 24 February 2006.  As I understand Mr Hung’s submissions, this is because the defendant had not hitherto addressed its mind to the question and the manner of delivery up of the Properties to the plaintiff, notwithstanding it had been asserting a lien since the demand for return was made in January 2006.

46.  In my view, this is unsatisfactory and hardly good enough for the purpose of the variation application.  Firstly, the defendant has not explained on the evidence how it was and why it was that it did not know, or could not have known of the legal impediments and impracticalities before the hearing.  Secondly, it is unconvincing that, notwithstanding the assertion of a lien, the defendant would not address its mind to the manner of returning the Properties to the plaintiff when it had always indicated that it was prepared to return the Properties to the plaintiff so long as its demand for payments and damages had been met.  Thirdly, the fact that the plaintiff’s summons was issued on 21 February 2006, only two days before the hearing, does not excuse the defendant.  There had been a number of correspondences exchanged between the parties’ solicitors since about 23 January 2006 over the return of the Properties.  It cannot be said that the defendant had been caught by surprise.

47.  In short, it is not open to the defendant to say that it could not reasonably have found out the legal impediments and impracticalities over the return of the models, moulds and silver accessories to Hong Kong in time to meet the plaintiff’s application.

48. That said, however, I accept that if it can be shown that it is legally impossible to deliver them in Hong Kong, then that will afford a proper basis justifying a variation of the previous order. However, it is one thing to say that it is legally impossible to deliver in Hong Kong, it is another thing to say that it is impracticable to do so.  The fact that it is impracticable to deliver in Hong Kong in accordance with the Order cannot justify a variation of the Order.

49.  This brings me to the expert evidence on the PRC law.  Insofar as the silver master models and the silver accessories are concerned, both the plaintiff and the defendant’s expert are in agreement that under the PRC law, the issue of an export permit by The People’s Bank of China is required for export of silver goods.  Further, only enterprises incorporated in the Mainland are eligible to apply for the requisite export permits. 

50.  It is not in dispute that the defendant was not incorporated in the Mainland and is not eligible to apply for an export permit in its own right.  However, it does not follow that it is legally impossible to export the silver master models and the silver accessories to Hong Kong.  While the defendant cannot apply for an export permit, it does not mean that it cannot procure a Mainland enterprise to apply for the relevant export permit.  The evidence filed by the plaintiff shows that the defendant had in the past delivered to the plaintiff in Hong Kong silver products manufactured by it in the Mainland.  The defendant does not dispute that, but explains that the quantity involved was small and was achieved as a result of assistance by other factories.  That may well be so.  What it does show is that it is not impossible, not to say legally impossible, for the defendant to procure the deliver up the silver master models and silver accessories in Hong Kong.

51. As to the rubber and metal moulds and the other items, the defendant’s case and evidence is that it is cumbersome and impracticable to deliver them to Hong Kong.  As noted above, the Order cannot be varied on grounds of impracticalities.

Liberty to apply

52. Finally on the liberty to apply provision (paragraph 7) under the Order dated 24 February 2006.  Having regard to the context of the discussions at the hearing, it was not intended to be a general liberty to apply.  What was contemplated was that the defendant might require more time to comply with the Order and the provision was to cater for such eventuality.

Conclusion

53. For the above reasons, the defendant’s summonses are dismissed.

54.  There is no reason to depart from the normal rule of costs follow event.  The costs of the summonses are to be paid by the defendant to the plaintiff, to be taxed if not agreed.