SHENZHEN ENVIROTEC ELECTRONICS CO LTD v. CELLPLUS (HK) LTD

HCA 786/2004

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 786 of 2004

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HCA 1034/2004

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1034 of 2004

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(Consolidated by order of Master de Souza dated 12^th November 2004)

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JUDGMENT

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Background:

1.  These proceedings comprise first, an action in which the plaintiff in HCA 786/2005, Envirotech China, sues the defendant, Cellplus for a sum in excess of US$3.3 million for goods supplied.

2.  Following the issue of those proceedings Cellplus, and Ms Wang, who is the majority shareholder in Cellplus, brought separate proceedings against Team Products International Inc, (TPI), Mr John Su, Envirotech China, and Shenzhen Honesty Electronics Co Ltd, (Honesty), for damages.

3.  Ms Wang says that she and Cellplus invent and design certain electronic products.  She says that by agreement with Mr Su, Envirotech China manufactures those products for sale by Cellplus to TPI, a major distributor of electronic goods in the United States of America.  The essence of the proceedings is a claim by Cellplus and Ms Wang that Mr Su, together with Envirotech China, and Honesty, both companies controlled by Mr Su, have conspired or otherwise co-operated with TPI, to deprive Cellplus and Ms Wang of their business with TPI, by undertaking direct dealings between Mr Su and his companies on the one hand, and TPI on the other, thereby cutting out Cellplus and Ms Wang.

4.  The claim as presently formulated is based upon breaches of duty allegedly owed by Mr Su and his companies to Ms Wang and Cellplus, the procurement by Mr Su of alleged unlawful acts by TPI,  Envirotech China and Honesty, the procurement by TPI of unlawful acts by Mr Su, Envirotech China and Honesty, and upon allegations of unlawful interference by both Mr Su and TPI in the contractual relations between TPI and Cellplus.

5.  On 27 April 2004, Envirotech China made an application for summary judgement pursuant to O 14, in respect of the amount then claimed in HCA 786/2004, US$2,921,430.40.  On 15 May 2004, that application was dismissed by consent.  On 12 November 2004, the two actions were consolidated by consent, and an order made that the two actions be heard at the same time.  At the same time Envirotech China applied, in HCA 786/2004, for an interim payment pursuant to O.29 r 12(c).  On 3 March 2005, the Master ordered an interim payment of US$1,234,849.31, to be paid within 28 days.  A stay has subsequently been ordered in relation to that payment.

6.  The first matter that I must deal with is an appeal against the decision of the Master to order an interim payment.  That is a matter which does not involve the solicitors or counsel for TPI, and they were not present on the hearing of that matter which took place on 13 May and 20 June 2005.  They were aware that the background matters as to the whole ambit of the proceedings would be covered in the course of those days hearing, and were content that I should hear those matters in their absence.

7.  The second matter that I must deal with is that Cellplus and Ms Wang, in HCA 1034/2004, has made application against all defendants for a further and better list of documents, and specific discovery, pursuant to O 24 rr 3,4, & 7.  The hearing of that part of the matter took place on 23 and 24 June 2005, when all counsel and solicitors were present.

The Interim Payment appeal:

8.  The basis for an order for an interim payment under O 29 r 12(c) is that:

“if the action proceeded to trial, the plaintiff would obtain judgement against the defendant for a substantial sum of money apart from any damages or costs,”.

In the course of his judgement the Master ruled that the interim payment should be made notwithstanding the fact that an application by Envirotech China for summary judgement had been dismissed by consent, that the evidence was that it was unlikely that there would be any prospect of repayment of the sum ordered, and the broader considerations of mutual justice between the parties.

9.  For Cellplus, Ms Wee makes three primary arguments: first, that the application for an interim payment is an abuse of process, being an impermissible second bite of the cherry, having regard to the dismissal, by consent, and without any conditions, of Envirotech China’s summary judgement application; second, that having regard to the consolidation of  the two actions, and the dismissal of the summary judgement application, Cellplus clearly has an arguable counterclaim and other claims which exceed the interim payment sought; and third, that there is no prospect of repayment from Envirotech China after the trial of the action.  As a final ground, Ms Wee says that an overview of the three primary arguments demonstrates a broad consideration of mutual justice which demands that there should be no interim payment.

10.  For Envirotech China, Mr Ng contends that the evidence is sufficiently plain that there can be no doubt that his client will succeed on the claim, that the counterclaim has either no chance or an sufficiently remote chance of success that regard should not be had to it, and finally that in the circumstances there is no abuse of process.  He says that the deprivation of Envirotech China’s funds is itself a matter of justice which demands an interim payment.

11.  By O 29 r 10(2), it is open to an applicant for summary judgement under O 14, to include in that application an application for interim payment.  The application for summary judgement, made nearly 6 months prior to the application for interim payment, did not include application for interim payment.  The application for interim payment itself was not made until five months after the dismissal of the application for summary judgement.

12.  I am satisfied that in the present circumstances, the application for summary judgement, having been dismissed, it is now an abuse of process for Envirotech China to seek an interim payment.  In British and Commonwealth Holdings plc v Quadrex Holdings Inc [1989] 3 All ER 492 CA, the Court considered the question whether it is possible to make an order for interim payment under O 29 in circumstances where it has been held that the defendant is entitled to unconditional leave to defend under O 14. The court said, at p 509A:

“it is impossible to make an order for interim payment where an unconditional leave to defend has been given.”

Lord Brown-Wilkinson VC gave the reason for this conclusion at p 519B:

“But O 29 (as construed by this court in the Shearson Lehman case[1]) requires the court, at the first stage to be satisfied that the plaintiff will succeed and the burden is a high one; it is not enough that the Court thinks it likely that the plaintiff will succeed at trial.  For myself I find it an impossible concept that the same court can be simultaneously ‘satisfied’ that the plaintiff will succeed at trial and at the same time consider that the defendant has an arguable defence sufficient to warrant unconditional leave to defend.”

13.  The application by Envirotech China for summary judgement was dismissed by consent on 15 May 2004, and the order duly perfected on 21 May 2004.  Mr Ng does not point to any material or relevant change in circumstances arising between either of those dates and the time of the application for interim payment.  Instead he sought to argue that the dismissal of the application for summary judgement, not having been argued, and being by consent, was not a bar to a subsequent application under O 29.

14.  I reject that contention.  A consent order providing for dismissal is, for these purposes, just as binding as an order dismissing an application following argument and a reasoned judgement.  See Dinch v Dinch [1987] 1 All ER 818 at 827 HL, approving the following statement of principle by Lord Herschel LC in Re American and Mexican Co ex. p. Bank of England [1895] 1 Ch 37 at 50:

“The truth is, a judgement by consent is intended to put a stop to litigation between the parties just as much as is a judgement which results from the decision of the Court after the matter has been fought out to the end.  And I think it would be very mischievous if one were not to give a fair and reasonable interpretation to such judgments, and were to allow questions that were really involved in the action to be fought over again in a subsequent action.”

I am satisfied that in the present circumstances, to entertain the application for interim payment, when an opportunity to ask for conditions on leave to defend, effectively interim payment, albeit usually into court, has passed with the dismissal of the application for summary judgement, would be to allow the relitigation of a dismissed application.  Even in cases where further evidence has been obtained, the reopening of an interlocutory issue has been refused: see Chanel Ltd v F W Woolworth & Co Ltd & Ors [1981 1 All ER 745.

15.  It is right as Mr Ng points out, that O 29 r 10(5) expressly allows a plaintiff to reapply for interim payment notwithstanding a previous unsuccessful application.  However the terms of the rule make it clear that such an application must be: “upon cause shown”.  It is plain from that statement in the rule that there must be a clear change in circumstances giving the court proper cause to make an order it has previously refused.  No such cause was shown in this case.

16.  Mr Ng sought to contend that there was no real basis in the proceedings brought by Cellplus and Ms Wang in HCA 1034/2004.  In particular he examined in detail the law as to restraint of trade and argued that any action based on a provision in the documentation between the parties which purports to limit the contact that may be made between Mr Su and TPI was so plainly an unreasonable restraint of trade that the action must fail.

17.  Now is not the appropriate time to consider in any detail the merits of HCA 1034/2004.  It is sufficient if I say that upon the papers I have seen, the circumstances are such that this is a case where upon, being presented with the claim in HCA 786/2004 for summary judgement and being asked by the defendant for unconditional leave to defend based upon the counterclaim as pleaded in HCA 1034/2004, and having regard to the affidavits that have been filed, I would have unhesitatingly given unconditional leave to defend. 

18.  At the present time the very comprehensive statement of claim that has been filed contains a heading “Unlawful Interference by TPI, Mr Su, Honesty and Envirotech China”.  I understood from Ms Wee that that pleading, (para 22), was intended to demonstrate that upon the facts previously pleaded, Cellplus and Ms Wang would contend that the tort of unlawful interference with economic and other interests had been committed by the defendants.  Whether the plea of that tort is justified on the facts remains to be argued, but I am left in no doubt at all, from the whole of the circumstances in the affidavits and the amended statement of claim, that it is strongly arguable on the part of Ms Wang and Cellplus that the defendants may be liable for the tort of knowingly and intentionally procuring a breach of contract: see Clerk & Lindsell on Torts 17^th Ed, para 23-09.  Although this particular tort is not specifically pleaded it is plainly raised on the statement of claim.

19.  It is a requirement under the Rules that the Court must be (i) satisfied that the plaintiff will (not “will be likely to”) obtain judgement in a substantial amount: see British and Commonwealth Holdings, p. 511, and (ii) that the Court must take into account any set-off, cross claim or counterclaim by the defendant.  In this process the standard of proof the Court must apply is the high one, on the balance of probabilities: see Yeung Sek-sung v Cheung For-ming [1991] 1 HKLR 1 at 4.  When regard is had to the proceedings in HCA 1034/2005, it is plain that no matter how clear the claim of Envirotech China is in HCA 786/2005, these criteria cannot be met.

20.  As a final matter I have regard to the judgement of Stock J. in Fortuna Apparels Ltd v Mega Style Ltd & Anor (unreported HCCL 173/1995), citing the judgement in British and Commonwealth Holdings at p 509, approving a statement in Gibbons v Wall, (unreported, The Times 24 February 1988), emphasising the importance of the plaintiff’s ability to repay should the trial unexpectedly go against the plaintiff.

21.  Nothing is said in the affidavits of Envirotech China as to its ability to repay any interim payment, should, at the end of the day, taking into account the counterclaim, it be found that Envirotech China is required to make a payment to Ms Wang and Cellplus.  To the contrary, in his affidavit in support Mr Su asserts that Cellplus’ refusal to pay has caused Envirotech China financial hardship and constraints in its cash flow, and that at times Envirotech China did not have enough cash to pay the workers in the factory on time.  That statement makes it quite clear that there is a real risk that in the event an interim payment is made, and required to be refunded, Envirotech China may not be in a position to make the refund.  It is very clear from British and Commonwealth Holdings that the order for interim payment was made because it was accepted that the plaintiff company could readily repay if it lost at trial.

22.  In all of those circumstances it would be quite wrong now to order interim payment.  For those reasons the appeal against the order of the Master that there be an interim payment is allowed.  The order is set aside.  There will be an order nisi that Cellplus will have its costs both on the appeal and before the Master.

The discovery applications:

23.  The application by Cellplus and Ms Wang in relation to discovery falls into two parts, first and application for a further and better list of documents, to be verified by affidavit, and secondly for specific discovery.  The application in relation to each set of defendants, TPI on the one hand and Mr Su and his companies on the other, is to all intents and purposes identical.  Both matters may be shortly disposed of as the principles to be applied in each case are well known, were not in dispute, and do not require review in this judgement.

A further and better list of documents:

24.  I am satisfied that the application for a further and better list of documents is, at this stage, premature, as it appears to me from the argument made in support that what was really sought were the documents identified as sought under the application for specific discovery.  The applications under O 24 rr 3 & 5 against all defendants are accordingly adjourned sine die, to be brought on at 14 days notice if thought appropriate by Ms Wang and Cellplus, following the completion of the current round of discovery.

Specific discovery:

25.  In so far as it sought specific discovery, the summons for discovery referred to certain documents set out in schedules attached to letters from Herbert Smith, (solicitors to Ms Wang and Cellplus), to the defendants’ solicitors on 23 March 2005.  In the course of the hearing both groups of defendants acknowledged that they would supply certain of the documents sought.  Their primary complaint was as to the extent of the documents sought, arguing that expressions such as “All documents” used in the schedules were too comprehensive and took the request beyond appropriate limitations of relevance.  While I accept that Cellplus and Miss Wang can justifiably demand specific discovery, in the circumstances the terms on which the demand has been made is too extensive.

26.  This may be demonstrated simply by reference to request 1.1, which is identical for both groups of defendants.  The demand is “All documents relating to the shipment of US$4,130,000”.  Cellplus’ concern is that this is a shipment to TPI of goods ordered from Cellplus, to be manufactured by Envirotech China, which order has been either completed by Cellplus, but payments made to Envirotech China, or wrongly completed by Envirotech China, and supplied directly to TPI, thus depriving Cellplus of any profit in the transaction.  Without limiting this comment to this transaction, I note that the documentation produced so far provides a prima facie basis upon which it can be said that Cellplus’ concern is justified.

27.  But the defendants rightly say that the expression “All documents” means that they would have to trawl through their files and to disclose not only those documents which identify the transaction, but also any documents which, for example, dealt with production problems, quality problems or other peripheral matters, plainly not relevant to the litigation in question.  The same complaint may justifiably be made in relation to requests 1.2 to 1.13, 1.15, 1.16, 1.20 to 1.24 of both schedules.

28.  It is plain what is really sought.  Cellplus seek to identify the shipments to which each of these requests are related in order that it may be determined whether or not they fall within either of the categories to which their complaint, as I have described it in para 26, relates.  There will be an order that the defendants must, in relation to requests 1.1 to 1.13, 1.15, 1.16, and 1.20 to 1.24 supply all documents sufficient to identify the goods involved and the shipments concerned with each request.  That will necessarily, but may not exclusively, include purchase orders, shipping documents, and payment documents.

29.  I note that in relation to requests 1.14, 1.16, 1.19 and 1.23, it was acknowledged by the defendants in the course of the hearing that attachments referred to in those requests will be supplied.

30.  The next request to be considered is for “All chains of e-mails that have included e-mails disclosed in (the lists) of documents”.  In order to make sense of e-mails, just as of letters, it is often necessary to see those which passed before or after a relevant document.  This is particularly so in relation to e-mails where it is common for a person to acknowledge a request with a simple agreement or response by using the “Reply” function in an e-mail program.  However the request for “All chains” is too wide.

31.  The responsibility is on the defendants to make appropriate discovery of relevant documents.  The ambit of the action is clear, and the obligation on the defendants is to make discovery is not only of documents which improve the defendants case or destroy the plaintiffs case, but also those which damage the defendants case and improve the plaintiff's case.

32.  I direct that the defendants must disclose sufficient chains of e-mails in order that e-mails disclosed are comprehensible.  If there is any specific area following that discovery in which the plaintiff has complaints, those complaints may be the subject of a further application.  The defendants when considering their duty to make discovery must have proper regard to the ambit of relevance as raised by the pleadings.  While the statement of claim in its present form may not be its final form, the complaints made by Ms Wang and Cellplus are sufficiently clear to allow the defendants to determine the areas of relevance.

33.  Both defendants are required under the request to supply all communications between TPI on the one hand, and Envirotech China, Mr Su, and Honesty on the other.  This is, to an extent, a justifiable request as the discovery made so far has disclosed documents properly discovered by one defendant, but not discovered by the other, thereby raising a real issue as to whether or not proper discovery has been made.  However the demand is too wide and covers a too extensive time period.

34.  TPI must discover all internal e-mails, documents or other communications, including internal documents or memoranda, whether arising as a direct result of contact with Envirotech China or Mr Su or Honesty or not, relating to or concerning a direct business relationship between TPI on the one hand, and Envirotech China, Mr Su, and Honesty on the other, made between 1 November 2003, and 30 May 2004.  In addition, Envirotech China, Mr Su, and Honesty must discover all internal e-mails, documents or other communications, including internal documents or memoranda, relating to or concerning a direct business relationship between TPI on the one hand and Envirotech China, Mr Su, and Honesty on the other, made between 1 November 2003, and 30 May 2004.

35.  The next request seeks accounting and financial records.  The accounting and financial records of TPI, and its relationship with Cellplus, are relevant in so far as, if it is established that Cellplus orders have been misappropriated by Envirotech China, those records go to establish losses suffered by Cellplus.  But at the same time the required information will most likely be disclosed by the disclosure of relevant purchase orders and payment orders.  At present stage I am not satisfied that the request for accounting and financial records of the defendants is sufficiently relevant to require the extent of disclosure sought.  In this respect the application is adjourned sine die, and may be brought on 14 days notice if, following the discovery there is a justification for further documents.

36.  There is a request for telephone records.  This arises as a result of a direct issue.  It is contended by TPI that they invited Ms Wang to a meeting which was held in Hong Kong on 24 March 2004.  There is a direct issue as to telephone calls made or not made on that day.  It is highly likely that such calls if made, were made on mobile telephones.  I do not know the extent of the records available, but it may well be that attempted but unconnected calls, (the position contended for by TPI), will be proved or disproved from those records.  TPI must disclose its telephone records, including all relevant mobile phone records, (which will include mobile phones in the name of an individual, but paid for by TPI), and any other document which might demonstrate the making of a telephone call, (including but not exclusively hotel accounts), for the period 20 March 2004, to 25 March 2004.

37.  The request for telephone records also arises indirectly.  The case for Cellplus is that there has been improper direct contact between Mr Su, Envirotech China and Honesty, on one side and TPI on the other.  It is argued that those records may demonstrate contact between those parties which might otherwise be denied.  As I understand the case there was, prior to the dispute arising, direct contact between Mr Su and Envirotech China on the one hand, and TPI on the other over matters of quality control and the like.  As telephone records do not distinguish the purpose of a call seems to me that there is no evidential value in the records sought which would accordingly be irrelevant.  If I am wrong in that understanding however, the records would be relevant as they would go to prove the fact of calls made in circumstances where there is no apparent reason for calls.  That is a matter to which the court would be entitled to look in drawing appropriate inferences.  I propose to leave the matter of parties to deal with in the light of the views I have expressed as to relevance in this paragraph.  In this respect leave is reserved to apply.

38.  A request is made for the corporate records of Envirotech China.  This is plainly relevant and arises from the pleaded allegation that there was an agreement between Ms Wang and Mr Su that two companies, Envirotech Hong Kong, in Hong Kong, and Envirotech China in China, would be incorporated with each of Mr Su and Ms Wang holding 50% of the shares.  Envirotech Hong Kong and was duly incorporated, with that shareholding.   However when Envirotech China was incorporated in China Ms Wang’s shareholding was significantly less than 50%.  The extent of the documents required to be disclosed is limited by the pleading. The terms of the request are realistic and recognise that limitation.  Appropriate discovery must be given by Envirotech China and Mr Su in terms of request number 3.

39.  Cellplus seeks ISO inspection records from TPI.  At this stage I am of the view that the request is peripheral and too wide, both in terms and over time.  If in due course following the inspection of the purchase orders and other documents I have ordered to be discovered there is still an issue, this matter may be revived.  Leave is reserved to apply, but at this stage the request is refused.

40.  A request is made for TPI’s staff termination documents.  This relates to a reduction in TPI staff in Hong Kong at about the time the direct relationship began between Envirotech China and TPI.  The issue arises directly from paragraph 21 of TPI’s defence in HCA 1034/2004.  The issue is whether or not the assertion that a headcount reduction had been planned prior to the arrival of Mr Stephen Levine in Hong Kong, and whether or not the headcount reduction was related or unrelated to the cessation of TPI’s relationship with Cellplus and the commencement of its direct relationship with Envirotech China.  The obligation for discovery is necessarily limited by the nature of the issue.  There must be appropriate discovery directed at that issue which will include any position papers prepared in advance, termination letters giving reasons for dismissal and other relevant documents going to the issue.

41.  It may well be that following the conclusions that I have expressed above there are still some areas of dispute as to the extent of discovery between the parties.  Accordingly leave is reserved to apply to all parties on any matter relating to discovery.

42.  All questions of costs on the application for discovery are reserved.

[1] Shearson Lehman Bros Inc v Maclaine Watson & Co Ltd [1987] 2 All ER 181.