KING FUNG VACUUM LTD AND ANOTHER v. TOTO TOYS LTD AND ANOTHER

HCA188/2004

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.188 OF 2004

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HCA4715/2003

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.4715 OF 2003

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JUDGMENT

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1.  The 1st and 2nd defendants are appealing against the decision of the Master in striking out part of the Amended Defence and Counterclaim.  The relevant parts struck out related to sums counterclaimed: (i) $639,735.37 and (ii) $170,633.31.

2.  The appeal did not seek to resurrect the counterclaim of $170,633.31 as the striking-out was conceded by counsel before the Master.  As to the counterclaim of $639,735.37, Mr Ng for the 1st and 2nd defendants filed an Amended Notice of Appeal, seeking re-amendment of the Amended Defence and Counterclaim.  Mr Kwan for the 1st and 2nd plaintiffs did not argue against the amendment.  Hence, the appeal was effectively on costs of the hearing before the Master.

Background

3.  2nd plaintiff and the 2nd defendant are relatives and they were in business together until early 2003, manufacturing toys built with components. 

4.  In 1998, the 1st plaintiff was incorporated.  2nd plaintiff was the 60% shareholder and the 2nd defendant and his wife as nominee were the 40% shareholders.  The 1st plaintiff manufactured four series of toys: the Marble Series, Miscellaneous Product Series, Screw Series and Space Series. 

5.  In 1997, the 2nd defendant was founded for the marketing and distribution of the toys.  Likewise, the 2nd plaintiff was the 60% shareholder and the 2nd defendant and his wife as nominee were the 40% shareholders. 

6.  The manufacturing arm of the 1st plaintiff is a joint venture factory in Shenzhen called the King Fung Factory. 

7.  Between late 2002 and March 2003, the 2nd plaintiff and the 2nd defendant reached an agreement, partially orally, partially in writing and partially by conduct, for the separation of the business and the division of the assets of the 1st plaintiff between them.  The terms of the agreement are in dispute.  For the present purpose, suffice it to mention the following terms of the Asset Agreement:

(1)	The 2nd plaintiff was to own the 1st plaintiff, and the 2nd defendant was to own the 1st defendant.
(2)	The 1st plaintiff was to transfer the office premises at Kowloon Bay (“the Premises”) to the 1st defendant or a nominee of the 2nd defendant, and the 2nd defendant was to pay the price of $1.2 million.
(3)	The 1st plaintiff is to “own” the Marble Series and the Miscellaneous Product Series, and the 1st defendant was to “own” the Screw Series and the Space Series.
(4)	For a period of one year from 1 January to 31 December 2003, the 1st defendant was to purchase component parts for the Screw Series and Space Series from the 1st plaintiff at 50% discount.

8.  There is in dispute as to whether “ownership” means ownership of the moulds or the copyright of the design parts.  The 1st and 2nd defendants alleged that they were free to produce the moulds for production of the series owned by them.  The 1st and 2nd plaintiffs alleged infringement of the copyright therein. 

9.  The 1st plaintiff claimed, inter alia, $353,270 as the component parts sold by it to the 1st defendant.  The 1st and 2nd defendants pleaded set off, by way of counterclaim, sums due to them in the amount of (i) $639,735.37 and (ii) 170,633.31.  The particulars relating to the sum of 639,735.37 are set out in Schedule B to the amended defence and counterclaim.  $639,735.37 are broken down into (i) $2,224, (ii) $260,152.88, and (iii) $377,358.49. 

10.  The sum of 2,224 was originally pleaded as “60% of legal cost of mortgage and change of name in title deeds undertaken by the 1st plaintiff.”  The sum of $260,152.88 was originally pleaded as “DN03/019 - salaries, severance payments and MPF, etc. paid by the 1st defendant on behalf of King Fung Vacuum Limited.”  The sum of $377,358.49 was pleaded as DN02/KF01 - amount temporarily paid by the 1st defendant on behalf of 1st plaintiff in early 2003.

11.  In draft Re-amended Defence and Counterclaim, the $2,224 is now sought to be pleaded as pursuant to an oral agreement between the 2nd defendant and the 2nd plaintiff that the 1st plaintiff would pay 60% of the legal cost of the mortgage and change of name of title deeds for the transfer of the Premises.  The sum of $260,158.80 is now sought to be pleaded as the sum payable to the staff of the 1st plaintiff pursuant to the request and oral agreement of the 2nd plaintiff on 15 January 2003 that the 1st plaintiff would reimburse the 1st defendant.  The sum of $377,358.49 is now sought to be pleaded as pursuant to an oral agreement between the 2nd plaintiff and the 2nd defendant in early January 2003 whereby it was agreed that the 2nd defendant would manage the King Fung Factory until the handover of the factory to the 1st plaintiff and that the 1st plaintiff would reimburse the 1st defendant for the expenses incurred by it before the handover.

12.  Mr Ng submitted that striking-out is a draconian power in that the claim of the 1st and 2nd defendants must be fundamentally flawed in the sense that no further particulars could assist their cause, or where there has been an express refusal to file further and better particulars or contumelious disregard of court orders, see British Airways Pension Trustees Ltd v Sir Robert McAlpine & Sons Ltd & Ors [1994] 72 BLR 31.  Mr Ng referred to the judgment of Saville LJ at page 33I that:

“The basis purpose of pleadings is to enable the opposing party to know what case is being made in sufficient details to enable that party properly to prepare to answer it.”

And further, at page 34C that:

“Each case must of course be looked at in the light of its own subject matter and circumstances.”

13.  Mr Ng submitted that in relation to the sum of $2,224 incurred in the transfer of the Premises, the only property transfer between the parties, the original pleading disclosed an undertaking of the 1st plaintiff to pay 60% of the legal costs. 

14.  In relation to the sum $260,152.88, it was stated to be payment of severance pay for the staff of the 1st plaintiff.  The 1st and 2nd plaintiffs should have knowledge that it was in relation to the “clean-break” arrangement in respect of the existing employees of the 1st plaintiff.  The payment was for the benefit of the 1st plaintiff.  An agreement to reimburse should be implied.

15.  In relation to the sum $377,358.49, reference to payment to King Fung Factory in early 2003 should have brought notice to the 1st and 2nd plaintiffs that it was expenditure for King Fung Factory pending the handover, hence, another benefit for the 1st plaintiff.

16.  Mr Kwan submitted that all the material facts should have been pleaded and the opposite side should not be expected to speculate on what the claims really were.  Mr Kwan submitted that notwithstanding that the pleadings could have been saved by an amendment, there was no such relief sought before the Master. 

17.  Mr Kwan referred to the original pleadings for legal costs.  He pointed out that it was not clear what property was referred to, nor whether “undertaking” was referring to 60% of the legal cost or the change of name undertaken.  And if “undertaking” was referring to the act of the re-mortgage and the change of name being done, it might not refer to any undertaking by the plaintiffs as to the legal costs at all.  Hence, an agreement to reimburse must be clearly pleaded.

18.  As to the two other items where it was said that they were payments for the 1st plaintiff’s benefit, Mr Kwan pointed out that before the separation, the 1st plaintiff and the 1st defendant were members of the same group, sharing the same staff and structure.  Hence, nothing could be taken to infer an implied request of payment by the 1st and 2nd plaintiffs or reimbursement by them.

19.  It is now clear from the proposed re-amendment that all the items of expenses, which the 1st and 2nd defendants are counterclaiming, are in reliance on an express agreement to reimburse.  I do not agree that any express or implied agreement cried out from the factual matrix without pleading it.  After all, the parties were to embark upon a course of separation.  It is a matter of agreement as to who was to get or give what.  I do not see that the mere identification of the payer and the payee would give rise to any express or implied agreement of reimbursement, let alone without pleading it. 

20.  On this point, I agree with the Master that the three items in Schedule B1 were liable to be struck out for disclosing no reasonable cause of action.  All but two sub-paragraphs of the pleadings struck out rise and fall with Schedule B1 except for paragraph 26(d)(i) and (ii) of the Amended Defence and Counterclaim.  In paragraph 26(d)(i), it is pleaded that the 2nd defendant is not liable to the 1st plaintiff for $353,270.  That was because the alleged purchase was made by the 1st defendant from the 1st plaintiff.  In paragraph 26(d)(ii), it was pleaded that the 1st and 2nd defendants are not liable to the 2nd plaintiff for $353,270.  That was because it was the 1st plaintiff and not the 2nd plaintiff who supplied the component parts to the 1st defendant.

21.  Mr Kwan pointed out that in paragraph 22 of the statement of claim, the 1st plaintiff claimed $353,270 from only the 1st defendant.  The 2nd plaintiff never made the claim at all, nor the 1st plaintiff claimed against the 2nd defendant.  Hence, paragraphs 26(d)(i) and (ii) were not necessary. 

22.  Mr Ng replied that paragraphs 26(d)(i) and (ii) were an overcautious reaction to the pleadings in paragraph 22 in the Statement of Claim that there was failure to pay “despite the plaintiffs’ repeated request.”  Mr Ng agreed that those paragraphs are not really necessary now and he does not insist on them.

23.  I hold that the appeal should be allowed on the basis of the proposed Re-amended Defence and Counterclaim. 

24.  Mr Ng agreed that the cost of and occasioned by the amendment should be to the 1st and 2nd plaintiffs, but submitted that the 1st and 2nd plaintiffs should not have the cost of today and the hearing below.  Mr Ng pointed out that the 1st and 2nd plaintiffs did not comply with Practice Direction 19.1 in setting out in writing the broad grounds of striking out the pleadings as disclosing no reasonable cause of action at least four clear working days before the day fixed for the hearing.  Further, as the pleadings were curable by amendment, they were not fundamentally flawed and the 1st and 2nd plaintiffs should have asked for further and better particulars in the first place.

25.  Mr Kwan pointed out that the solicitors for the plaintiffs did write to the solicitors for the defendants on 2 February 2005 albeit only in threatening to strike out the impugned parts of the Amended Defence and Counterclaim on the ground of amendment without leave.  Mr Kwan also pointed out that the summons identified the precise paragraphs to be struck out and, hence, they satisfied the spirit of PD19.1.

26.  Mr Ng submitted that the identification of the paragraph was not the same as setting out the broad grounds of striking-out.  The allegation that the pleadings lack material facts as constituting cause of action should have been stated.  If so apprised, the 1st and 2nd defendants might have asked for amendment before the Master and a hearing before the Master might have been saved. 

27.  Be that as it may, the argument today was that the original pleadings should not have been struck out even without amendment.  The 1st and 2nd defendants fail on that as it is clear that the pleadings lack the requisite particulars.

28.  As for the hearing before the Master, notwithstanding PD19.1 was not complied with, I find that the 1st and 2nd defendants did not suffer any prejudice as the summons set out the parts of the Amended Defence and Counterclaim sought to be struck out, and an application for amendment before the Master could reasonably have come from the 1st and 2nd defendants. 

29.  Hence, I rule that the 1st and 2nd defendants should be entitled to the costs herein and below.