PASCAL MANAGEMENT LTD AND ANOTHER v. TSO HON LEUNG AND ANOTHER

HCA 180/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

HIGH COURT ACTION NO. 180 OF 2011

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D E C I S I O N

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1.  This is the application by the plaintiffs by original action and the defendants by counterclaim for leave to amend pleading. The trial of the action will commence on 25 February 2014.

2.  For the present purpose, I shall refer to the applying parties as the plaintiffs and the respondents the defendants.

THE APPLICATION

3.  This action concerns an agreement for the sale and purchase of the defendants’ company (the 3^rd plaintiff by counterclaim) by way of share transfer.  The deal collapsed.  The plaintiffs claim, among other things, the return of a sum of HK$2 million paid as deposit (and part payment) of the agreed price to the defendants for the purchase of the shares in the company.  The agreed price was HK$6 million.

4.  In their defence and counterclaim, the defendants contend that pursuant to the oral agreement between the parties, the parties would be entitled to a sum of HK$2 million as liquidated damages, upon the default of the other party.  Saying that it was the plaintiffs who were in repudiation, the defendants claim for a declaration that they are entitled to forfeit the sum paid by the plaintiffs.

5.  In reply, the plaintiffs deny the existence of the alleged oral agreement.

6.  As the pleading now stands, the only issue in dispute is whether the alleged oral agreement existed.  But now the plaintiffs want to say, as an alternative, that the alleged agreement in respect of the sum, even if existing, would amount to a penalty in any event (“the Penalty Issue”).  Hence the proposed amendment to the reply to introduce this issue.

7.  The defendants oppose.

8.  I do not doubt the potential relevance of the Penalty Issue.  It is really the lateness of the application and the risk of injustice in allowing or refusing the proposed amendment at this stage that concern me in the exercise of my discretion.

LATENESS OF THE APPLICATION

9.  As a matter of pleading, the defendants have from the outset pleaded the alleged agreement in respect of the sum of HK$2 million as liquidated damages as well as their alleged right to forfeit the sum.  As mentioned, in the reply, the plaintiffs merely deny the existence of the alleged agreement.

10.  The plaintiffs last took out a summons seeking to amend not only the statement of claim but also the reply.  This was allowed by consent during the pre-trial review on 5 December 2013.

11.  The further amendment now proposed was not included in that summons.  It was during the hearing of that summons at the pre-trial review that Mr Chong for the plaintiffs indicated his clients’ intention to further amend their reply to raise the Penalty Issue.

12.  In the absence of agreement (which would not have been expected then from the defendants that were taken by surprise) or actual application in respect of the yet another amendment of the reply before this court then, the intended further amendment could not be taken further.

13.  The lateness of the application, or actually the failure to include the further amendment in the last application (at the latest), was not explained by affidavit.  But Mr Chong fairly accepted the blame on behalf of his clients and even took upon himself the responsibility for that.

14.  The thought for yet another amendment must have arisen after the last summons for amendment had been taken out, if not just a last-minute thought prior to the pre-trial review. In any event, this piecemeal style of amendment of pleading reflects a lack of comprehensive consideration or review of the pleaded case at the appropriate time.  This is not the appropriate time; and the defendants were the authors of their own predicament.

PREJUDICE

15.  It is argued that the Penalty Issue should have been pleaded in the statement of claim.  Now that it is sought to be introduced in the reply, the defendants would be deprived of the opportunity to respond.  It is also argued that the amendment, if allowed, would also necessitate the adducing of further evidence in respect of the new issue.

16.  As a matter of principle, whether the allegedly agreed sum was genuine liquidated damages or penalty is a question of mixed law and fact.  Once the issue is raised, the defendants would indeed be entitled to set out the facts on which they say the alleged forfeiture of the sum as liquidated damages could be justified.

17.  Even assuming that it is not objectionable to raise the Penalty Issue in the reply, the defendants nevertheless must be afforded with the opportunity of responding to the new plea by seeking to file a rejoinder pursuant to O.18, r.4 of the Rules of the High Court (“RHC”).

18.  Further, in line with the newly pleaded facts, the parties would also be entitled to adduce evidence in that respect.  For the defendants, it would be evidence in justification of the term as a genuine pre-estimate of the damage that they would suffer as a result of the plaintiffs’ default.  Apparently the alleged term was said to be mutual.  The plaintiffs likewise would be entitled to adduce contrary evidence.

19.  As to nature of the evidence contemplated, the defendants suggest that expert evidence on the trade practice may be necessary.  Mr Chong argues that one could hardly suggest a trade or practice in respect of the sale and purchase of shares in a private company.

20.  I agree.

21.  Further, whether a term like the one in question is a genuine pre-estimate of the damages or a penalty would essentially depend on first, the precise term agreed upon; and second, the circumstances in which such a term was crafted and agreed.  Both must be fact sensitive; and the answer must be decided on the own facts of each particular case.

22.  Mr Chong also points out that the defendants have not identified in their affirmation in opposition the content of the evidence or the witness that might be necessary to testify, if the amendment was allowed.

23.  I observe that too.  But Mr Chan (with Ms Yung) for the defendants submits that his clients should not be deprived of the opportunity of setting out the facts and adducing evidence in response; and that the remaining 2 weeks prior to the trial for such purpose is unrealistic and unreasonable.

24.  On the one hand, I accept Mr Chong’s argument that it is the burden of the defendants to substantiate any prejudice; and the court has to act on the affidavit rather than speculation at this stage.

25.  On the other hand, I have no reason to believe that it is going to be a one liner in the defendants’ rejoinder to deal with the Penalty Issue or that it is going to be a just a few more paragraphs of witness statement of the existing witness for the defendants.  The possibility of the plaintiffs to file evidence in response consequentially also could not be discounted, notwithstanding Mr Chong’s indication now but before knowing the facts and evidence that the defendants will introduce to deal with the Penalty Issue.

26.  Most importantly, that to expect the defendants to accept an inevitably compressed timetable to rush up with the additional pleading and evidence as a result of the amendment at this stage would be utterly unfair, bearing in mind that all are now the result of the manner in which the application to amend has been taken out as mentioned above.

27.  That the intention to introduce such amendment was made known during the last pre-trial review would not change that.  The defendants are not expected to incur costs in preparing the case on the assumption that the amendment would be allowed, unless the application has indeed been heard and so decided by the court.

28.  I therefore disagree with Mr Chong that there would be no prejudice to the defendants as a result of the amendment sought at this stage.  With that in mind, I say that that the 4-day trial to commence in 2 weeks’ time would be jeopardized as a result of the proposed amendment, if allowed, would be more than a mere possibility.

29.  In the circumstances, it would be against the underlying objectives of the RHC and current practice of the court to allow the proposed amendment of the pleaded case at this stage of the proceedings.  The post-CJR cases cited by Mr Chan were instances of the court’s exercise of the discretion; and have provided the necessary guidance to my consideration in this respect.

ORDER

30.  The application is dismissed with costs to the defendants in any event to be taxed, if not agreed, with certificate for counsel.