SUN YUET TAI LTD. v. BRITISH AMERICAN TOBACCO CO. (HK) LTD.

HCCL 281/96

Headnote

Discovery - Liberty to Apply - Practice and Procedure - Order 24 of Rules of High Court.

The Plaintiff took out a summons in 1998 for an order requiring confirmation as oath whether the Defendant has or had certain classes of documents. The summons was heard and order in terms made in 1998 with "liberty to apply". Subsequently, the Plaintiff filed and served an affirmation alleging additional classes of documents should exist and the Defendant be required to confirm whether it has or has those documents. A date was obtained for having full arguments without taking out a fresh summons. The Defendant opposed on the grounds that (1) the initial summons has been spent and liberty to apply was confined to working out the initial order and (2) the Defendant having filed and served a verifying affidavit pursuant to the order, the Plaintiff is bound to accept that affidavit as conclusive and precluding further application for discovery.

Held (1) liberty to apply is not confined to working out the order providing for liberty; (2) an order for discovery under Order 24 r.7 of RHC coupled with liberty to apply enables rolling discovery; (3) all that is required for the court to make an order under Order 24 r.7 of RHC is a supporting affidavit containing adequate materials; even if a summons or notice of application is required, the court may in appropriate cases dispense with such formality; (4) since the verifying affidavit is conclusive only as to the classes of documents covered by it, it is open to the opposing party to seek a further verifying affidavit on additional classes of documents provided sufficient merits are shown; and (5) the Plaintiff having shown that prima facie additional relevant classes of documents may exist and is or had been in the possession custody or power of the Defendant, the Defendant was ordered to file and serve a further verifying affidavit.

HCCL 281/96

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMMERCIAL ACTION NO. 281 OF 1996

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J U D G M E N T

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The parties came before me on 24th March 1999 on an application by the Plaintiff for further discovery and a summons by the Defendant for security for costs.

The Defendant's summons seeks $3 million from the Plaintiff as security for costs meanwhile the proceedings herein be stayed. Although the Plaintiff agreed to provide such security, at my suggestion, the terms of the order made on this summons was framed as an unless order so as not to hinder any pending application or further process until time for the Plaintiff to furnish security has expired. This then enabled the court to proceed to consider the Plaintiff's application for further discovery.

2. It is common ground, as apparent from the pleadings, that the Plaintiff and the Defendant had a contract ("the Contract") whereby the Defendant would supply exclusively to the Plaintiff with tobacco products at the lowest price for distribution in certain parts of China. The Plaintiff claims that in breach of the Contract the Defendant supplied World Trading Company tobacco products at even cheaper prices for sale in China. The Defence is essentially a factual denial.

3. On 11th March 1998, Stone J., on a summons taken out by the Plaintiff, made an order ("the initial order") in the following terms:-

1. The Defendant by a responsible officer thereof do within 14 days from the date of this Order make and file an Affidavit stating whether the Defendant has or has at any time had in its possession, custody or power the documents specified in the schedule annexed to the Plaintiff's Summons dated 19th February 1998 and if the said documents or any of them has or have been but are not now in its possession, custody or power stating when it parted with the same and what has become of the same; and

2. Costs of this haring be reserved and with liberty to apply.

4. The schedule referred to and thus incorporated into the initial order reads:-

S C H E D U L E

1. Sales invoices from the Defendant to World Trading Company for the period between January 1992 and January 1997.

2. Correspondence between the Defendant and World Trading Company since the beginning of 1995 in relation to supply of the Defendant's products to the ports and ferries of the Guangdong port corporations.

5. In due course, the company secretary of the Defendant filed and served an affidavit ("the Verifying Affidavit"). The relevant parts of the Verifying Affidavit say:-

"3. The Defendant does not have and has never had in its possession, custody or power the documents specified in the Schedule below:

Schedule

(1) Sales invoices from the Defendant to World Trading Company for the period between 31st January 1992 (i.e. the date of the Agreement signed by the Plaintiff and the Defendant) and January 1997.

(2) Correspondence between the Defendant and World Trading Company since the beginning of 1995 in relation to supply of the Defendant's products to the ports and ferries of the Guangdong port corporations.

4. I crave leave to refer to the Supplemental Affirmation of Tong Chor Yin filed on behalf of the Plaintiff on 11th March 1998, and in particular the exhibit marked "ATCY-1" consisting of copies of three export permits issued by the Hong Kong Government to World Trading Company dated 15th August and 17th October 1995 ("the Export Permits") for cigarettes to be removed from the Defendant's warehouse. None of these documents was previously within the possession, control or power of the Defendant.

5. I must point out at the outset that the cigarettes covered by the Export Permits did not belong to the Defendant. They belonged to an associated company of the Defendant, namely, B.A.T. China Limited ("BAT China") and were sold by BAT China, not the Defendant, to World Trading Company. At all material times, it was BAT China rather than the Defendant who had business with World Trading Company.

6. The Defendant is a private company incorporated in Hong Kong on 27th February 1919 and is a subsidiary of British American Tobacco Company Limited which is a U.K. private company. On the other hand, BAT China is a company incorporated in U.K. on 6th March 1914 and registered in Hong Kong as an overseas company under Part XI of the Companies Ordinance on 21st January 1992. BAT China and the Defendant are in fact two separate legal entities.

7. At all material times, BAT China did not have any godown facilities in Hong Kong, therefore it had to make use of the Defendant's facilities to store its goods. The goods which belonged to BAT China were always separately stored in the Defendant's godown specifically designated for BAT China. Besides, the goods which belonged to BAT China had different markings than those of the Defendant. It was highly unlikely that the goods of BAT China could be mixed up with those of the Defendant.

8. It was under the aforesaid circumstances that the cigarettes referred to in the Export Permits and sold by BAT China to World Trading Company were removed from the Defendant's godown for delivery to World Trading Company.

9. I also seek leave to refer to paragraph 7 of the said Supplemental Affirmation of Tong Chor Yin which itself referred to a letter dated 18th August 1995 allegedly written by the Defendant to World Trading Company. There is now produced and shown to me marked "LKCF-1" a copy of the said letter together with its English translation. It is clear from the letter itself that it was written to World Trading Company by BAT China rather than the Defendant. I confirm that the said letter was not previously within the possession, control or power of the Defendant."

6. The Verifying Affidavit attracted further response from the Plaintiff. On 10th June 1998, the Plaintiff filed an affirmation by one of its officers named CHAN Kar-leung ("the Supporting Affirmation"). According to Mr. Warren Chan, S.C. for the Plaintiff, the Supporting Affirmation shows BAT China and the Defendant conducting themselves as one and the same person in transactions with the Plaintiff, and pointed out a number of incidents which supported the fact that BAT China and the Defendant were in fact different divisions within the same organisation. These incidents are:

(a) 1994	lunch meeting with T.T. Tan who doubles as top management of the Defendant and BAT China
(b) since 94	interchangeable use of letterheads of the Defendant and BAT China (para. 4)
(c) since 94	BAT China and the Defendant share key staff (para. 5)
(d)	invitation and sponsorship by China BAT (para. 6)
(e) 13/7/95	meeting with T.T. Tan (paras. 7 and 8)
(f) 95	notices of new prices applicable to the Plaintiff issued by BAT China (para. 9)
(g) 28/7/95	BAT China offered Incentive Far East Trip (para 10)
(h) 6/3/96	BAT China asserted "our contract with [the Plaintiff] (para. 11)
(i) 16/4/96	gifts ordered by Defendant but given by BAT China (para. 12)
(j) 4/96	BAT China attended meeting of the Plaintiff and the Defendant to talk about this case (paras. 13 and 14)
(k) 3/97	BAT China letter asserting Plaintiff to be its business partner (para 17)

7. Mr. Chan took pains to emphasize that none of the facts stated in the Supporting Affirmation has been challenged by the Defendant in any way. The Defendant, however, protested about references to the meeting in April 1996 between the parties and BAT China. It is said that that meeting was conducted on "without prejudice" basis. To this, Mr. Chan said that the Plaintiff does not rely on what transpired at the meeting. The purpose of referring to the meeting is to show that BAT China attended the meeting.

8. Obviously, it is not appropriate at this stage to determine the exact relationship between the Defendant and BAT China or the role, if any, of BAT China in the alleged breach of contract that is the subject of the action herein. However, based on the Verifying Affidavit, the Supporting Affirmation, and taking into account information that may be gleaned from the Export Permits, it is reasonable to believe that:-

(1) The Defendant and BAT China shared common business interests and acted jointly in many instances; and

(2) The Defendant provided facilities for or assisted BAT China in the supply of tobacco products to World Trading Co. at lower prices, the supply defeats the purposes of the Contract between the Defendant and the Plaintiff that is the subject of the action herein.

9. Whether the provision of facilities or assistance by the Defendant to BAT China amounts to breach of contract between the Defendant and the Plaintiff is a question of mixed law and fact to be determined at the trial. It follows that evidence tending to show (1) how and to what extent the Defendant provided facilities and assistance to BAT China to supply goods to World Trading Co. and (2) the role of BAT China in the conduct of the business affairs of the Defendant are relevant matters for the court to consider at trial. In particular, if there are documents evidencing dealings between BAT China and World Trading Company, the fact that such documents are or were in the possession, custody or power of the Defendant is in itself material tending to show conduct on the part of the Defendant that is inconsistent with its contractual obligations towards the Plaintiff. Of course, again, whether such inconsistent conduct amounts to breach of contract is not an issue to be resolved before trial, but it is a relevant issue that the Defendant is entitled to explore by the process of discovery.

10. Mr. Chan emphatically pointed out that the Plaintiff is not yet seeking production of BAT China documents. By this application, the Plaintiff seeks confirmation on oath from the Defendant whether the Defendant has or had in its possession, custody or power documents evidencing dealings between BAT China and World Trading Company. This is not an application for discovery against BAT China. The Defendant is not yet required to produce any document. The Defendant may well state on oath, in all honesty, that it does not have and has never had any of the documents referred to in this application.

11. Mr. Ng for the Defendant opposes the application on two grounds. First, counsel said that the application is a non-application because there is no summons or notice of application before the court. There was a summons for the initial order heard by Stone J. on 11th March 1998 but the Plaintiff having obtained the initial order last year this repeated application is vexatious. In so far as the Plaintiff relies on the "liberty to apply" provision in the initial order, the authorities indicate that "liberty to apply" is limited to use for working out the main order. Counsel referred to the case of Cristel v. Cristel [1951] 2 KB 725.

12. In Cristel v. Cristel, there was a consent order requiring a husband to provide suitable alternative accommodation in the form of a "house or bungalow" for his estranged wife. The husband later took out a summons seeking to vary the consent order to "house or bungalow or flat". The summons was dismissed on appeal.

13. With respect, I think Cristel v. Cristel is dubious authority. I say dubious without meaning to question in any way the reasons or decision of the English Court of Appeal. I mean it is the sort of case that can be cited out of context. It is true that part of the judgment of Hodson, LJ reads, "The words "Liberty to apply" in their context add nothing to the order, which, of itself, required something further to be done far it to be worked out." But one has got to see the real reason for their lordships decision:-

"In the present case, I have come to the conclusion that words "or flat" cannot be added. It is a plain alteration of what had been agreed. No change of circumstances such as was put forward in Abbott's case is suggested. It is an attempt by the husband to enlarge the categories of alternative accommodation which were expressly limited by the order." per Somervell, LJ at p.730.

"If there were no unforeseen change of circumstances, for instance, if the wife were left by will another house, or if she took an alterer to live with her in this house, should have thought that the "Liberty to apply" would enable the court to remedy the position .... But when there is no change of circumstances, I do not think that the court can alter or vary the agreement of the parties under the "Liberty to apply". It can only do what is necessary to carry the agreement into effect." per Denning, LJ at p.731.

"For the reasons which have been given by Somervell, LJ I am of the opinion that it is not open to him to come and ask the court to alter the agreement by adding the words "or flat" to the description of the accommodation contained in the order." per Hodson, LJ at p.731.

14. Even the headnote of that case is rather cautious and not as helpful to the Defendant's case as Mr. Ng believes it is:-

"Held, that the words "Liberty to apply" referred prima facie to the working out of the actual terms of the master's order, that the word "house" did not cover a flat, and the insertion of the words "or flat" would amount to a variation of the order; and that in the absence of any change of circumstances the judge had no power to vary the order of the master."

15. It appears that if there is restriction in the scope of liberty to apply, that restriction is only prima facie. In appropriate cases, the liberty to apply may extend beyond the working of the order in question. The dicta from Denning, LJ (as he then was) quite clearly supports a wider scope of liberty to apply. More important, it is abundantly clear that the true rationale of the decision of all three distinguished judges was that the order was based on agreement by the parties and that in the normal course of events an order by consent should not be varied on application by one side.

16. Mr. Chan further drew my attention to John Walker & Sons Ltd. v. Henry Ost & Co. Ltd. [1970] R.P.C. 151. This is a Court of Appeal decision directly on Order 24 rr.7, 16, and 17. The background of that case is unimportant for present purposes, suffice to say that the matter before the Court was whether the defendant in that case may revive its defence which had been struck out earlier. The following extract from the judgment of Harman LJ at pp. 154-156 is highly instructive:-

"True it is that one cannot when an affidavit of documents or a list of documents is produced, file an affidavit to say: "Well, I do not believe this man has told the truth or disclosed everything he ought to". The affidavit is, as they say, conclusive. But of course there is a process, which is now Ord.24 r.7, whereby particular documents may be asked for. That has to be done on affidavit, giving reasons why the deponent considers that such documents must exist. There has been some such affidavit here, and that is the affidavit to which I have referred, dated the 16th July. There has been no application under that rule, because the matter has not taken that course ....

.... But it seems to me that what we must require of the second defendants as a condition of the restoration of their defence to the file is that some responsible officer of theirs - not their solicitor - should make an affidavit which should be put on the file stating whether or not they have or ever have had in their possession documents coming within the category specified in sub-paragraph 2 of paragraph 16 of Mr. Saundor's affidavit, and whether any of such documents are relevant to the matters in question in this action ... If for some reason or other the plaintiffs are still dissatisfied with the answer on that particular matter, then they will be at liberty, of course, to bring the matter forward before the Master again: there will be, therefore, liberty to apply."

16. As I have mentioned at the hearing, I agree with Mr. Chan. The liberty to apply in the initial order should be taken in the same vein as the order made by Harman LJ. Furthermore, it has not escaped my notice that in John Walker & Sons Ltd. v. Henry Ost & Co. Ltd. Harman, LJ invoked Order 24 r.7 notwithstanding that there was no application under that Order. In the present case, there is application albeit not by way of a fresh summons or formal notice of application.

17. Even if a fresh summons or formal notice of application is required, Mr. Ng conceded that I have power under the Rules of High Court to sweep aside formal requirements. The court, of course, does not do so without justification. Now, this matter was listed for one day for hearing full arguments on the merits. I have heard full arguments on the merits. If I throw out the Plaintiff's application for want of form, there is nothing to prevent the Plaintiffs from taking out a fresh summons for the same order expected from me. The fresh summons will mean rehearsal of all the arguments already covered at the hearing before me. Assuming I make the correct decision on the merits, the judge who hears the fresh summons will do the same. I do not see any sense in wasting time and public resources for insistence on form. Like Mr. Chan said, Mr. Ng has not demonstrated how the Defendant is prejudiced by informality. I have no doubt that as early as June 1998, the Defendant has been made well aware of what the Plaintiff is seeking, for paragraph 18 of the Supporting Affirmation says:

"..... Under the circumstances, the Plaintiff is advised by its legal advisers and verily believe that the Plaintiff is entitled to the documents sought as the documents are in the possession, custody and power of the Defendant."

18. The other ground of objection canvassed by Mr. Ng for the Defendant is that the Plaintiff is bound to accept the Verifying Affidavit furnished pursuant to the initial order and has no right to seek a further affidavit. The principal authority relied upon in this regard isLonrho plc v. Fayed and Others (No.3) The Times, 24th June 1993. I do not think it is necessary to go into the judgment in that case. It is accepted by Mr. Chan and I that the Plaintiff is not entitled to challenge the contents of the Verifying Affidavit by cross-examination of the deponent or by introduction of an affidavit for the Plaintiff with contrary facts. Indeed, as Mr. Chan put it, the Plaintiff is not seeking to challenge the Verifying Affidavit. The Supporting Affirmation only puts forward justification for discovery of additional classes of document relying on facts stated therein which are not yet controverted by any evidence from the Defendant.

19. Two subsidiary authorities referred to by Mr. Ng are Re Tecnion Investments Ltd. [1985] BCLC 434 and Innovations Ltd. v. Chan Sing-chuk, Charles and Others [1992] 2 HKLR 306.

20. With respect, none of the said authorities assist the Defendant. They are plainly beside the point. The point of objection is well and amply refuted by the judgment of Harman, LJ in John Walker & Sons Ltd. v. Henry Ost & Co. Ltd. [1970] RPC 151 at pp.154-156 which I have already reproduced above and which deserves close reading again.

21. It is patently clear from the judgment of Harman, LJ that the conclusiveness of the Verifying Affidavit does not prevent the court from ordering a further verifying affidavit in relation to different classes of documents. And, if the Plaintiff is not satisfied with the answer to a verifying (or further verifying) affidavit, the Plaintiff is entitled to apply again. Inevitably, I am driven to the conclusion that an order made under Order 24 r.7 with liberty to apply enables rolling discovery in appropriate cases. Moreover, as per the order made by Harman LJ requiring the defendant toverify on oath whether the documents disclosed are relevant, discovery under Order 24 r.7 is not confined to documents patently relevant but may extend to potentially relevant documents. In this case before me, the Plaintiff is not content with the Verifying Affidavit. The Plaintiff is seeking additional classes of documents. And, in my view, there is a prima facie case that the documents in question do exist and, if they are or had been in the possession custody or power of the Defendant, are relevant to the case.

22. At one stage during the hearing, I wondered if the better approach would be for the Plaintiff to apply for discovery directly against BAT China as a non-party or directly against BAT China after joining BAT China as a party. After giving more thoughts to these alternatives, I believed it was just as well that the Plaintiff probed further with the Defendant for, depending on further confirmation on oath from the Defendant, it may be unnecessary to directly involved BAT China in these proceedings.

23. I, therefore, ordered the Defendant to file and serve a further affidavit on the following classes of documents:-

(1) Sales invoices from BAT China to World Trading Company for the period between January 1992 and January 1997.

(2) Correspondence between BAT China and World Trading Company since the beginning of 1995 in relation to supply of the Defendant's products to the ports and ferries of the Guangdong port corporations.

24. After the order was made, Mr. Ng indicated to the court that the Defendant had given standing instructions to appeal against the court's order and to ask for stay of the order pending appeal. He added that if there be no stay, it would render the success of appeal nugatory.

25. Mr. Chan took exception to the application for stay. Ironically, Mr. Chan turned the requirement of form against the Defendant. Counsel said that an application for stay must be supported by affidavit stating the grounds. There is no affidavit for the purpose. As to the argument that enforcement of the order to be appealed against would render the success of appeal nugatory, Mr. Chan contended that there would be no harm on the Defendant except for the costs of preparing the further verifying affidavit which will, of course, be compensated by an order for costs by the Court of Appeal if appropriate. Moreover, Mr. Chan suggested that standing instruction to apply for stay on the basis of standing instructions to appeal without even taking time to consider the judgment of the court to be handed down is not the sort of attitude to be encouraged. I found those arguments compelling. Accordingly, I refused stay.