MEGA YIELD INTERNATIONAL HOLDINGS LTD v. FONFAIR CO LTD

HCA948/2009

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 948 OF 2009

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JUDGMENT

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1. The defendant seeks specific discovery of 5 categories of documents said to be relevant to the issue of causation and mitigation.

BACKGROUND

2. The defendant was the owner of a Property in Yau Tong (“the Property”). The parties entered into a pre-lease agreement dated 24/1/2007 whilst the Property was still occupied by another tenant.  On 12/9/2008, the parties entered into a tenancy agreement for a term of 2 years commencing on 20/10/2008 subject to an option to renew for one year.  The tenancy agreement provided that if the existing tenant delayed in vacating the Property, the commencement of the tenancy shall be extended to a date not later than 20/12/2008 and the expiry of the term shall be extended accordingly.  The rent was to be $170,000 per month in the first 2 years and $250,000 per month in the third.

3. The Property was intended for the erection and operation of a concrete batching plant and ancillary office.  The period for obtaining permission and waiver, including removal of unauthorized structure lasted from February 2007 to August 2008.

4. Due to refusal of the previous tenant to move out, the defendant was unable to deliver vacant possession by 20/10/2008.  On 16/3/2009, the Property was even taken over by creditors of the previous tenant.

5. The writ was issued on 31/3/2009.

6. In about May 2009, the plaintiff tried to obtain a substitute site at Ping Che but failed after spending about $1,000,000.  The application to the government for using that site was withdrawn a year later on 15/6/2010.  In January 2010, the plaintiff tendered for and succeeded in acquiring a 5-year lease of a substitute site at Aberdeen (“the Aberdeen Site”) through its wholly owned subsidiary Excel Concrete Ltd (“ECL”).  The lease term started on 15/3/2010.  The plaintiff is also operating a concrete batching plant at Pat Heung (“the Pat Heung Site”).

7. The plaintiff claims for damages in the region of $90 million including, amongst others:

(i) Additional rent of $73.69 million, being the difference between the costs of renting the Property and the Aberdeen Site;

(ii) Storage costs of about $250,000 for temporary storage of machinery and related materials originally intended for use at the Property between 20/12/2008 (latest date for commencement of lease of the Property) and 15/3/2010 (day before commencement of lease of the Aberdeen Site) (this period will be called “the relevant period”);

(iii) Operational overhead of $7,00,000 being sums paid to employees to be deployed at the Property for the relevant period;

(iv) Expenses of about $1,000,000 for attempting to procure the Ping Che Site as substitute.

8. The defence disputes the loss and puts in issue the steps allegedly taken in mitigation.  It asserts that the expenditure relating to the Ping Che Site was not the result of the plaintiff’s attempt to procure the site as substitute and that the Aberdeen Site could not be treated as a substitute site.  Further, the defendant alleges that it had regained vacant possession of the Property on 29 May 2009 and had offered to lease it to the plaintiff on the same terms, to commence no later than 15/6/2009, which the plaintiff had declined.

9. The defendant seeks specific discovery of 5 categories of documents which have been revised during submissions,  The revised version is marked up as follows:

1) All written communications, including internal communications, relating to work done by the plaintiff’s employees (for and on behalf of the plaintiff and/or ECL) as specified in paragraph 2(a) below (i.e. the 8 specified employees), emanating from and received by Mr John Lam in [the relevant period], putting together such documents in chronological order, and having them paginated and allowing inspection of such documents by the defendant …”

2) Resignation  and/or termination notices given during the relevant period by or to any of John Lam and 8 other named employees;

3) Records relating to purchase of 2 units of MOB-90 mobile batching plant together with its silos and conveyors and 1 unit of XG955 II pay-loader allegedly stored at DD113, Lot 299 RP, Cheung Po Tsuen, Pat Heung, Yuen Long;

4) Tenancy agreement and any pre-lease agreement relating to the Pat Heung Site with a concrete batching plant coming into existence after September 2009 to 30/9/2010, the application for planning permission from the Town Planning Board concerning the site and the correspondence between the plaintiff or its subsidiary and the consultants relating to this application for the same period.

5) Written communications between the plaintiff and Townland Consultants Ltd in connection with the application for planning permission in respect of the Ping Che Site and documents relating to the extension of the pre-lease agreement entered into between Ever Colour Lithographing Factory Limited and the plaintiff dated 22/6/2009.

THE LEGAL PRINCIPLES

10. The 3 tests for founding jurisdiction are relevance, existence and possession.  They have been summarized by Madam Justice Chu in Annabell Kin Yee Lee & others v. Lee Wing Kim (May Lee) & another, HCAP 5/2003, 5.3.2003:

“8.  The relevant principles underlying an Order 24, rule 7 application are set out by Mustill LJ in Berkeley Administration Inc. & Others v. McCelland & Others [1990] FSR 381 at 382-3. The relevant part of the judgment reads :

" (1) There is no jurisdiction to make an order under R.S.C., Order 24, rule 7, for the production of documents unless (a) there is sufficient evidence that the documents exist which the other party has not disclosed; (b) the document or documents relate to matters in issue in the action; (c) there is sufficient evidence that the document is in the possession, custody or power of the other party.

(2) When it is established that those three prerequisites for jurisdiction do exist, the court has a discretion whether or not to order disclosure.

(3) The order must identify with precision the document or documents or categories of document which are required to be disclosed, for otherwise the person making the list may find himself in serious trouble for swearing to a false affidavit, even though doing his best to give an honest disclosure.

(4) It has been suggested that the court should approach the appeal on the basis that this is a matter of discretion, and that the appellate court should not ordinarily interfere with that discretion in the absence of misdirection or some other factor which, according to familiar principles, would justify it in taking such a course. This is right as regards the exercise of that discretion which arises once the conditions for the existence of jurisdiction have been satisfied. But on the question whether they have been satisfied and whether the order is in the appropriate form, we are not concerned with discretion at all, and they are reviewable without inhibition by the appellate court.

(5) It is not an answer to an assertion that documents falling within a particular category are disclosable that no such documents are in the other party's possession or power, although if this information has already been conveyed on oath in the course of the proceedings this would furnish a reason why, in the exercise of the court's discretion, it might well not make an empty order." ”

11. Every document should relate to the matters in question in the action, which not only would be evidence upon any issue but also which contained information which may either directly or indirectly enable the party requiring the affidavit either to advance his own case or to damage the case of his adversary: Deak & Co (Far East) Ltd v. N.M. Rothschild & Sons Ltd [1981] HKC 78, adopting the Peruvian Guano test. 

12. Even if existence, possession and relevance are established, discovery will still only be granted if it is necessary for fairly disposing of the cause or matter.  It will be oppressive if a person is required to search for and discover an enormous amount of documents: Deak & Co (Far East) Ltd v. N.M. Rothschild & Sons Ltd [1981] HKC 78.

13. Documents shedding light on the amount of damages where quantum is in issue are normally disclosable: Matthew & Malek, Disclosure, 3^rd ed, at para 5.21.

CATEGORY 1 – COMMUNICATIONS WITH MR JOHN LAM

14. The plaintiff has produced the employment contracts of Mr John Lam (the Managing Director) and 8 other employees who should have been deployed to work on the Property.  They held positions of production manager, technical manager, a/c & administrator manager, operation coordinator, assistant plant supervisor, batcher, labour/loader operator, assistant technical supervisor. Save for his own  contract, all other employment contracts were signed by Mr John Lam.  All employees had been employed 2-3 years prior to the time the defendant was required to deliver possession of the Property to the plaintiff.

15. The defendant claims that these employment contracts suggested that there were other operations which had nothing to do with the anticipated concrete batching operations at the Property for which those employees were employed and so the defendant was not liable for the claim for operational overhead in the amount of $7 million.  The defendant claims that “unless the plaintiff is compelled to make further discovery of documents showing the operations that were actually engaged by these employees in the [relevant period], there is nothing to stop the plaintiff from claiming that the other operations for which these employees were employed had stopped or that these employee were no longer assigned to deal with the other operations by October 2008”.  The defendant believes that there must be communications between Mr John Lam with other employees which will enable the defendant to ascertain what operations were actually engaged by the employees in question during the relevant period.

16. The defendant points out that the plaintiff’s witness statements stated that the sums paid to staff and workers were “completely wasted” expenditure and that they “were not gainfully employed” in the relevant period.  The court should be informed of what exactly the staff did during the relevant period to be able to decide whether the employee had been made futile and whether the expenditure would not have to be incurred but for the alleged breach on the part of the defendant.  According to the witness statement of Mr Zen of the plaintiff, the plaintiff had indeed been engaged in other operations during the relevant period such as trading of quarry products via one Topfield International Trading Ltd, which the plaintiff acquired in January 2008. 

17. The plaintiff objects to production on the ground that this category of documents is irrelevant, unspecific and oppressive:

(i) That Mr John Lam was neither a party nor a witness in this action. 

(ii) It must be oppressive on account of the voluminous documents sought.  It would entail the plaintiff incurring substantial expense, inconvenience and trouble in locating all documents emanating from and received by a former employee.  How could the plaintiff ascertain what documents would constitute all the documents?

(iii) Given Mr John Lam’s position, the documents may contain information which the defendant is not entitled to inspect.

(iv) A glance at the employment contracts already provided to the defendant will destroy the defendant’s assertion that there were other operations which had nothing to do with the anticipated concrete batching operations in the Property for which the employees were employed.

18. Objection (i) cannot hold water. What the defendant is seeking are documents in the plaintiff’s (not Mr Lam’s) possession.

19. With regard to objection (ii), there is no evidence on the likely volume of documents involved.  The plaintiff claims in Mr Zen’s witness statement that expenditure was “completely wasted” in the sense that the staff was assigned to search for alternative sites and the workers were assigned to carry out routine maintenance of the stored plants/equipment.  With such confined types of work, the volume of documents involved might be limited.

20. With regard to objection (iii), there is no explanation as to what information the defendant was not entitled to inspect and what the recognized ground for withholding disclosure is.

21. With regard to objection (iv), the plaintiff is correct that the employment contracts did not specify what the work operations which the employees were to engage in.

22. In my view, the original scope of category 1 was too wide.  It did not specify the nature of communications the plaintiff was required to produce. Hence, an email from one of the 8 employees asking Mr Lam to grant leave of absence would have fallen within its terms.  The way the defendant, anticipating that the communication might be voluminous, required documents to be put into chronological order and paginated for inspection also indicated that the scope of discovery might be far reaching and the defendant just wanted to fish for evidence.  The plaintiff has suggested that the defendant should seek discovery of time sheets which, however do not exist.

23. The revised version shows improvement. It requires discovery of virtually the full working portfolio of Mr John Lam over a period of 15 months.  Even so, why it was necessary to include communication relating to work done on behalf of ECL was unclear.  ECL eventually obtained the Aberdeen Site as substitute for the plaintiff but as pleaded, that was still done on behalf of the plaintiff.  The defendant cannot seek discovery in relation to work done on behalf of ECL generally.

24. The overheads expenses claimed were a staggering sum of $7 million.  The plaintiff has not given a breakdown of the work done by the Managing Director and the 8 employees.  This category of documents may shed light on what they had done and whether reasonable steps in mitigation of loss by alternative deployment had been taken.  The defendant has established that this category is relevant and it will assist in destroying the adversary’s case.  There is no dispute that this category of documents exists and is in the possession of the plaintiff.  I grant an order for discovery under category 1 as revised.

CATEGORY 2- RESIGNATION / TERMINATION NOTICES

25. This category as revised is not opposed.

CATEGORY 3 – MACHINE PURCHASE RECORDS

26. This category is not opposed.

CATEGORY 4 – PAT HEUNG SITE DOCUMENTS

27. The defendant’s reason for seeking discovery was that based on the letter dated 22.2.2011 from the plaintiff’s solicitors, the plaintiff had admitted having a concrete batching plant at the Pat Heung Site although it was not in existence between December 208 and September 2009.  The implication was that the site was in existence after September 2009. The defendant asserts that this category of documents “will show whether the huge amounts of expenditure incurred in respect of the Ping Che Site and the Aberdeen Site were in fact pursuant to the plaintiff’s attempts to find a suitable site to start and operate its own concrete batching plant as a result of the defendant’s inability to give possession of [the Property] to the plaintiff.”

28. The plaintiff objects to production because the Pat Heung Site was leased only in September 2010.  The plaintiff is not basing its damages on the costs of renting the Pat Heung Site.

29. It is claimed that the documents are relevant on the following grounds:

(i) Whether the plaintiff had made any profit from the operation of the Pat Heung Site following its failure to take possession of the Property, which profits should be given credit in assessing the damages awardable to the plaintiff (if any, which is denied);

(ii) Whether it was feasible for planning permission to be obtained and other necessary measures to be carried out by the plaintiff for the Pat Heung Site before any concrete batching plant started operating there, such as to make it a suitable substitute for the Property;

(iii) If so, whether it was necessary and reasonable for the plaintiff to opt for the Ping Che Site and then the Aberdeen Site, rather than the Pat Heung Site, as substitute for the Property.

30. In my view, this category of documents cannot show what profits (or loss) the plaintiff has made.  However, I am satisfied that the defendant has made out a case of relevance under grounds (ii) and (iii).  The plaintiff’s application for approval and waiver for the Ping Che Site and Aberdeen Site took months or even more than a year.  It would not be unreasonable to assume that some application for approval and/or waiver had been done before the date of the lease/pre-lease of the Pat Heung Site.  Bearing in mind that the Aberdeen Site was only applied for and obtained in January 2010, discovery of this category of documents (particularly if the Pat Heung Site was leased in 2009) can lead to a train of enquiry as to whether this Pat Heung Site was a substitute rather than that in Ping Che or Aberdeen.

31. Moreover, as the solicitors for the defendant stated in their letter dated 24.2.2011, the defendant may be able to demonstrate that regardless of whether they could deliver the Property on time, the plaintiff would have continued to look for other sites to expand its business. Therefore there was no causal link between the costs incurred for the Ping Che Site and the breach of tenancy agreement by the defendant.

32. Category 4 documents would have existed and should be in the possession of the plaintiff.

33. I make an order for discovery of this category, save that for clarity purpose, I revise the wording further to “… coming into existence on/or after September 2009 but on or before 31/8/2010”.

CATEGORY 5 – THE PING CHE SITE DOCUMENTS

34. This category is not opposed.

CONCLUSION AND CONSEQUENTIAL ORDERS

35. I grant the defendant’s application for specific discovery of the 5 categories of documents as revised and further amended by me for category 1(by deletion of the words “an/or ECL”) and 4 (to “on/after September 2009 but on or before 31/8/2010”).

36. Within 28 days from the date of the handing down of this decision, the plaintiff do make and serve on the defendant a further supplemental list of the documents ordered and there be inspection of those documents within 7 days thereafter.

37. As agreed, the time for all interlocutory applications to be taken out as required under Registrar Lung’s order shall be within 4 weeks after expiry of the time for inspection specified in the preceding paragraph.

38. Parties do attend before the Listing Officer on 25/7/2011 at 2:45 pm for fixing a 2^nd CMC before a judge with one hour reserved.  If it is anticipated that the CMC should last longer, the parties should write jointly to me at least 7 days before 25/7/2011.

39. Not less than 7 days before the next CMC, partie s shall file and serve an updated certificate signed by their respective trial counsel giving the usual estimates as to time.

40. Costs of this CMC (10 minutes hearing) to be in the cause.

41. As the actual use of the documents is yet to be seen, and there have been substantial revisions to the categories of documents during the arguments, I make an order nisi that the defendant should have costs of the summons in the cause with certificate for counsel.

42. I thank counsel for their assistance.