ON SKY ENTERPRISE (HK) LTD v. LANCO INTERNATIONAL HOLDINGS LTD AND OTHERS

HCA 529/2010
HCMP 921/2010

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 529 OF 2010

MISCELLANEOUS PROCEEDINGS NO. 921 OF 2010

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BETWEEN

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J U D G M E N T

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1.  The Plaintiff applies for extension of time to file and serve its consolidated statement of claim (“CSOC”).  It is opposed by the 3^rd, 6^th and 7^th Defendants^[1] (collectively “the Defendants”) and is met with an application to strike out the action on the ground of delay (“the striking out application”).

The Facts

2.  The Plaintiff made 2 loans to D1 which were secured by, amongst other, D3’s personal guarantee, a legal charge over his matrimonial property and legal charges over 3 properties owned by D3, D6 and D7 (being related companies) respectively.   D1 had failed to pay interest since April 2009.  The outstanding amounts under the 2 loans were respectively US$5.6 million and CAD2.36 million.  The Plaintiff seeks recovery of the loans and enforcement of the guarantee and legal charges.

3.  The Writ was issued on 16.4.2010 for recovery of the loans.  An originating summons was issued on 14.5.2010 to enforce the legal charges pursuant to Order 88 of the Rules of the High Court.

4.  The defence is one of undue influence and misrepresentation by D2, of which the Plaintiff allegedly had notice.  Rescission of the loan agreements and guarantee are sought by counterclaim.

5.  The Plaintiff denies the allegations.  It alleges that D3 had commercial benefits in making the impugned loan and security transactions. He had been warned to seek independent legal advice on the legal charges.  Being represented by solicitors in the execution of the loan agreements and guarantee, any misrepresentation, if made, was by his solicitors.  Moreover, D3 had affirmed the first loan agreement by asking for redemption of the legal charge.  Despite lapse of reasonable time, he had not sought rescission until the Defence was filed.

6.  On 26.10.2010, after a contested hearing, Master R. Lai made a consolidation order (“the Consolidation Order”) that:

(i)  The originating summons proceedings do stand as if commenced by writ;

(ii)  There be consolidation of the 2 sets of proceedings;

(iii)  The Plaintiff do have 28 days to file and serve its CSOC;

(iv)  The Defendant do have 28 days to file and serve its defence.

7.  The time for filing the CSOC expired on 23.11.2010.

8.  On 25.10.2011, the Plaintiff sought time extension for the filing and service of the CSOC.  Contents of the draft CSOC were similar to the statement of claim filed under the writ action.

Grounds of the Striking Out Application

9.  The Defendants complain that there was inordinate and inexcusable delay giving rise to substantial risk that it is not possible to have a fair trial or is such as is likely to cause serious prejudice to them.  They rely on the 2^nd limb of Birkett v. James [1978] AC 297and Grovit v. Doctor[1997] 1 WLR 640.

10.  The defence will allegedly depend very much on D3’s evidence and recollection of circumstances, some dating back to 1996.  D3 is now aged 83 and used to reside in Australia.  He is suffering from various health problems.  In around May 2011, he postponed an eye surgery, with a risk of further loss in his left vision.  He had wanted to check with his solicitors as to the next step forward and to assess whether it would be alright to go away for surgery and stay home in Australia as medically advised.

11.  D3 came back to Hong Kong towards the end of May 2011.  He was informed by his solicitors that the Plaintiff had not taken any further step in these proceedings in violation of the Consolidation Order.  D3 was advised by his solicitors “that it was not a proper time to take out an application for dismissal for want of prosecution.  [He] waited for another few months and still the Plaintiff has taken no further action.  In the hope that the Plaintiff’s action may die a natural death, [he] decided to go back to Australia for his scheduled surgery in October 2011.”  On the eve of his departure, he was informed of the Plaintiff’s time summons, which he regarded as a sudden “revival” of the present proceedings.

12.  This meant he would have to postpone his surgery again, thereby running a substantial risk that his vision would be permanently damaged.  In that unfortunate event, it will have severe impact on the preparation of his defence.  Not only would he encounter logistical difficulties in giving instructions to his solicitors, but he would not have the opportunity to refresh his memory by looking at the contemporaneous documents.  His memory is fading with his age.  There is a real risk that a fair trial of the issues can no longer be possible as a result of the Plaintiff’s delay in the past year.  He therefore promptly took out the striking out summons before flying out to Sydney on 28 October 2011.

13.  In Sydney, his doctor confirmed that his vision had further deteriorated since May 2011.  He postponed the surgery to come back to Hong Kong on 10 November 2011 to continue with the preparation of the present applications.

14.  D3 claims that the Plaintiff has “preyed on” his age and deteriorating health to its advantage.  There was a good chance that he might not be able to see the case through and the Plaintiff’s action was a questionable tactic to delay the trial.

15.  The 2 applications should be dealt with as one.

The Applicable Principles

16.  After counsel have filed their skeleton submissions, the Court of Final Appeal laid down comprehensively the principles on striking-out for want of prosecution post-Civil Justice Reform: The Liquidator of Wing Fai Construction Company Limited (in compulsory liquidation) v Yip Kwong Robert, FACV3/2011, 8.12.2011 (“the Wing Fai case”). In summary, the foundation for the jurisdiction to strike-out for delay is abuse of process of the court by the plaintiff and the power should be exercised only in plain and obvious cases.  The principle in the 2^nd limb of Birkett v. James is an example of such abuse.  But mere delay is insufficient. The Court should make greater use of its case management powers and peremptory orders instead of adopting the all or nothing approach of either allowing the action to continue or striking it out.  The learned Chief Justice Ma (with whom other members of the Court of Final Appeal agreed) held as follows:

“75.  It is not appropriate to deal on a comprehensive basis with the many nuances that can arise in an application to strike out for want of prosecution (such as the different shades of prejudice that can arise when proceedings have been subjected to delay) but the following principles ought to be borne in mind in most cases:-

(1) It is first important to bear in mind that striking out is a remedy of the last resort, as stated above, and only where it would be plain and obvious to do so.  If there are other measures that are more appropriate to be taken, they ought to be.

(2) Abuse of the process of the court is the foundation for the exercise of the jurisdiction to strike out for delay.

(3) Abuse can take many forms.  The Birkett v James second limb will continue, where it is proved, to be a form of abuse so that inordinate and inexcusable delay causing real prejudice would be an abuse.  Thus, where a delay which is inordinate and inexcusable causes a substantial risk that a fair trial is not possible, this is perhaps the most compelling form of prejudice to a defendant: cf Birkett v James at 318C-D.  There may be other forms of prejudice, such as the prejudice caused by proceedings hanging over the head of a defendant, causing undue anxiety (‘Biss’ prejudice: see para. 17(5)(c) above). …

(4) In the context of abuse, some mention should be made of ‘warehousing’.  I have already referred to this earlier.  Merely for a party to start proceedings and then delay (which will often involve a failure to comply with the applicable rules of court) will not necessarily amount to an abuse justifying an order to strike out an action.  The appropriate remedy in such cases may be for the court to exercise some of the powers I have already mentioned (such as the making of peremptory orders, the payment into court of substantial sums etc).  In order for the ‘warehousing’ of claims to justify striking out, it must be clear that the plaintiff is abusing the process of the court.  Accordingly, where the ‘warehousing’ of claims indicates that there is simply no intention to bring proceedings to a conclusion or there is a “wholesale disregard” of the rules or court orders, abuse can be found to exist:- see Grovit v Doctor at 647G-H; Arbuthnot Latham at 1436F-G.  …

(5) It is still important when looking at the aspect of delay that it should be both inordinate and inexcusable, and that abuse is shown.  It has never been the law that mere delay will be sufficient to justify an order to strike out …

…

(7) I now deal with prejudice.  I agree with the proposition that where abuse is clearly demonstrated, proceedings can be struck out even where prejudice to the defendant cannot be shown.  For example, where there is contumelious conduct on the part of a plaintiff, no prejudice to the defendant need necessarily be shown.  However, in the majority of applications to strike out for delay, the aspect of prejudice to the defendant will often be extremely relevant.  Mr Barlow submitted at one stage that post-CJR, prejudice will not be relevant at all. That is not a correct submission.  In my view, prejudice to the defendant (whether it exists or not) can still be very much a factor.  It is a factor that may well be relevant to the overall justice of the case: see Purefuture Limited v Simmons & Simmons [2001] CP Rep 30 at para. 54(2).

(8) As to the conduct of the parties, this will of course remain a relevant consideration of the court. …I have no quarrel with the court having to consider the very important fact of whether a delay has made a fair trial possible nor with the court having to consider the overall administration of justice, but it is wrong to say that the conduct of the parties is not a relevant consideration.  Quite the contrary, it will be relevant both to the critical question of abuse as well as to the overall justice of the case. Thus, post-CJR, where all parties to the proceedings have the obligation to prosecute the proceedings and assist the Court in furthering the underlying objectives, it would be highly relevant to consider any failure on the part of the parties here.  As far as the defendant is concerned, I would say once again that there is no place anymore for defendants to adopt the attitude of “letting sleeping dogs lie”.   No longer will it be possible (if it ever was) for a defendant to sit idly by and do nothing, in the hope that sufficient delay would be accumulated so that some sort of prejudice can then be asserted.  If it is sought to be argued that time has dimmed the memories of witnesses, the court will usually want to know what steps have been taken by the defendant to take instructions, or proof or locate witnesses: cf the remarks of Ribeiro JA in Hymer v Mass Transit Railway Corporation [2000] 2 HKLRD 589, at 610D-J.   The court will certainly want to know what the true nature of the defence is, in order to assess the extent of the prejudice suffered by a defendant.

…

(10) I have made several references now to the factor of the non-expiry of the limitation period. From now on, it should be made clear that this should no longer be a factor which will militate against an order for striking out.” 

17.  The following issues are pertinent in this case:

A.  Was there inordinate and inexcusable delay on the part of the Plaintiff?

B.  Was there prejudice to the Defendant arising out of the delay?

C.  Did the Plaintiff abuse the process of the Court?

D.  Conduct of the Defendants.

E.  Options available to the Court.

Inordinate and Inexcusable Delay

18.  The Plaintiff has waited for about 11 months before seeking the time extension, when it has been represented throughout by the same firm of solicitors.  The Plaintiff’s explanations for the delay were that:

(i)  Senior counsel took over from the previous counsel and hence had to read up all documents against a tight schedule for his commitments in other cases.

(ii)  The Plaintiff’s director, Mr Alan Chu, who has first-hand information about details of the case frequently travelled for business in 4 places in the world.  It was difficult to get him to hold meetings with senior counsel.

19.  In Fortune Asset Development Ltd v. De Monsa Investments Ltd [2009] 4 HKLRD 439, I have summarized the matters to be taken into account in the exercise of the discretion for extension of time.  Amongst them are the principles in sub-paragraphs 14(e) and (g):

“14 (e) Has the applicant used his best endeavours to secure the attendance of a witness to take instructions and impressed upon that witness the importance of attending on a certain date to affirm?

14 (g) That a client or witness has to travel frequently out of the jurisdiction is not a good reason in itself given advanced means of communication these days by e-mail, fax and telephone conference.  It is incumbent upon the applicant to obtain instructions for drafting the affirmation in good time and to impress upon the witness the need to turn up on a designated date to affirm.”

They apply equally to the preparation of pleadings.

20.  The Plaintiff’s lame excuses therefore need only to be stated to have them dismissed.  Those 2 matters causing delay were within either the control of senior counsel and/or the Plaintiff.  The delay in seeking time extension was inordinate.

21.  The Plaintiff has given scant details of what had been done in those 11 months, hiding behind the veil of legal professional privilege.  The Court is not given information on e.g. the volume of materials which counsel had to plough through. It is wholly ridiculous to suggest that senior counsel needed almost a year to understand a case involving a not uncommon defence in Order 88 applications.  (And one will note also that the previous counsel who drafted the statement of claim was a competent senior junior counsel who must have done the bulk of the work.) 

22.  Mr Mak, counsel for the Plaintiff, points out that the Plaintiff only sought to engage senior counsel after the Consolidation Order and it should be given a reasonable time for securing the engagement of the senior counsel, followed by a reasonable time for the senior counsel to advise on merits and to draft and settle the CSOC.  Such time went beyond 24 November 2010.  With respect, this argument is misconceived.  Once a timetable has been fixed by the Court, a party should engage counsel who can meet that timetable.  If the party reasonably foresees that the time is not sufficient, it is incumbent on him to seek extension of time as soon as possible.

23.  In the Wing Fai case, the learned Chief Justice said,

“75 (11) I would also reiterate that under the new CJR regime, it remains the position that the fact any delay was caused by the plaintiff’s legal representatives, will not be relevant to the exercise of the court’s discretion. This was the position before: see Birkett v James at 324A-E. For better or worse, acts done or omitted to be done by a party’s legal representatives will be attributable to that party…”

24.  Mr Mak also points out that since the Consolidation Order, the Plaintiff has, on 7 December 2010, elected to receive repayment in Canadian dollars under the Supplemental Agreement.  On 13 December, the Plaintiff issued further demands to D2 to D7. These have been pleaded in the draft CSOC.  He submits that time should only be counted after time expired for the Defendants to respond to the further demands, i.e. 27 December.  With respect, these matters were not relied on by the Plaintiff in its explanations for the delay.  Even if they can be considered, the delay was reduced only by about one month and was still inordinate.  Moreover, the Plaintiff never even suggested that by making the election and further demands it had any belief that the Defendants would not contest the action so as to dispense with the need to prepare the CSOC.  This line of argument is again misconceived.

25.  Further, the Plaintiff’s director clearly placed his/the Plaintiff’s business interests above this action.  It was the Plaintiff’s deliberate choice to litigate at its own pace and condoned the inability of the senior counsel to meet the Court’s timetable. 

26.  Order 1A, rule 3 imposes a duty on the parties and their legal representatives to assist the Court to further the underlying objectives of the Rules of the High Court, one being to ensure that a case is dealt with as expeditiously as is reasonably practicable. 

27.  Suggesting a timetable to the Court without belief that it can be complied with, taking up instructions for drafting pleadings without reasonable belief of finishing within the timetable set by the Court, failure to advise a client to seek extension of time upon default in compliance with a step in the timetable and giving greater priority to business interest than complying with the Court’s timetable, are all examples of not assisting the Court.

28.  I find that both the Plaintiff and (and with its condonement) the senior counsel have failed to assist the Court to ensure compliance with the first step under the Consolidation Order.  The delay was both inordinate and inexcusable.

Prejudice Suffered by the Defendant

29.  D3 will be the main witness for the defence.  As supported by the medical reports, I accept that his eye condition has deteriorated rapidly in the past year. Further delay will cause further prejudice to his health.  Whilst one can say generally that memory may be impaired with time, there is no medical evidence that D3 actually suffers from any memory problem.

30.  D3 suggests that proper preparation of the case for trial may be affected because of his eye problem.  However, D3 has been legally represented throughout the negotiation on the loan or security documentation and at the time of its execution. He was also able to recollect details and made 4 very detailed affirmations under the 2 sets of proceedings.

31.  The Plaintiff purports to show that the D3 was engaged in 5 sets of different legal actions apart from the present consolidated proceedings between 2002 and 2010. In one of the actions, D3 was the Plaintiff and even acted in person.  Such evidence tends to show that D3 was not only able but in fact actively involved himself as litigation parties.

32.  Of those 5 actions, D3 claims that:

(i)  He had no knowledge of 2 claims at the Small Claims Tribunal;

(ii)  In one action, he and his son had paid up their shares and the action was concluded;

(iii)  In one action where he was the plaintiff acting in person, the trial had concluded in November 2010 and judgment is pending;

(iv)  He lost in one action.

33.  Mr Ho SC rightly points out that apart from item (iii), D3 has not been actively involved in litigation in the past year.  Even if he has been, in my view, that should not have relevance on whether he will able to conduct this action effectively.

34.  With all the documentary evidence and his affirmations to assist him, the prejudice to the Defendants can be regarded as insubstantial and not such as to deprive them of a fair trial.

35.  Mr Ho SC relies on Wing Fai Construction Co. Ltd. v. Cheng Kit Yin Kelly, HCA 833/2004, 19.10.2010, Poon J, to show that upon breach of a court order (for security for costs in that case) and upon a finding that there was inordinate and inexcusable delay, it was not necessary to show prejudice to the Defendant before extension of time was refused and a claim could be struck out for want of prosecution.  On appeal, CACV249/2010, 8.4.2011, the Court of Appeal did not disapprove of what Poon J said. 

36.  I respectfully differ from Mr Ho’s interpretation of the case.  One must not overlook the evidence there that the plaintiff’s decision not to provide security for costs in April 2007 when it was able to do so, coupled with its application of its resources when available to other actions, was clearly a deliberate commercial decision (a) to continue to act in breach of the 2005 Order and (b) not to continue with the present action for the time being until it was financially able to do so.  There was an express finding by Poon J (affirmed by the Court of Appeal) that there was warehousing of the action by the plaintiff.

37.  In the Wing Fai case, the learned Chief Justice in paras 69 and 75(5) made it clear that using striking out as a remedy of last resort does not signal a more relaxed approach on the part of the courts regarding delays in litigation. Mere delay is not sufficient to assist the Defendant. 

Abuse of Process by the Plaintiff

38.  On its face, the Plaintiff’s claim is supported by loan/security documentation prepared by solicitors.  Huge sums are owed.  The Plaintiff has promptly commenced the action within a year of default in payment of interest.  The Plaintiff has also promptly prosecuted the proceedings until the present default.  How can it be suggested that it started this action with no intention to prosecute it? 

39.  Mr Ho SC suggests that the pointers of abuse were that: (i) the draft CSOC was not materially different from the statement of claim;  (ii) the Plaintiff exhibited a tenfold delay after the Defendant had filed substantial affirmations; and (iii) the Plaintiff took the attitude that the older D3 gets the better it was for it.

40.  In my view, the lack of material difference between the draft CSOC and the statement of claim merely showed consistency in the Plaintiff’s case and its belief in its veracity.  The Defendant’s disclosure of his case may have made it more difficult for the Plaintiff to win the case but there is nothing to show that the defence is so strong as to warrant withdrawal of the claim.  Whilst the Plaintiff might know the advanced age of D3, there was nothing to show that the Plaintiff knew about his health condition so as to take advantage of it.  I am not satisfied that the Plaintiff has abused the process.

Conduct of the Defendants

41.  The Defendants have never applied for an unless order and contributed to the delay.  They have not prosecuted their counterclaim either. The reasons given by the Defendants in paragraph 11 above were precisely what the Wing Fai case regards as unacceptable (see para 75(8) of that case).

“47. This attitude of “letting sleeping dogs lie” is no longer acceptable post-CJR, where all parties to a litigation have the obligation to progress an action so that they are brought closer to the resolution of their dispute, rather than be distracted by litigation tactics. It is also important to bear in mind that post-CJR, the parties and the court have at their disposal many options to enable an action to progress to the ultimate resolution of the relevant dispute. An ‘all or nothing’ approach whereby a defendant can sit idly by while delays accumulate in the hope that, if of sufficient length, the delay can lead to a chance to apply to strike out for want of prosecution, is nowadays in my view, a deeply unattractive approach, particularly in the light of O.1A r.3 (see para. 34 above).”

42.  Mr Ho SC invites me to treat the Wing Fai case as a “watershed” to examine the Defendants’ conduct.  With respect to Mr Ho SC, I do not think there will be much difference.  The present case was launched post-CJR.  Even before the Wing Fai case, there has been an established practice for the innocent party to come to Court for an unless order to compel compliance with a court order.  The state of the law then required the defendant to show prejudice under Birkett v. James and the Grovit v. Doctor principles were confined to patent abuse of process: New China Hong Kong Group Ltd v. AIG Asian Infrastructure Fund LP [2005] 1 HKLRD 383.  It was still not worth taking out an application to dismiss for want of prosecution when the limitation time has not expired.   The Defendants’ application was but an opportunistic one.

43.  I am not satisfied that the Defendants’ conduct was free from blame.  They have also failed in their duty of assisting the Court in furthering the same underlying objective set out in para 26 above.

Options Available to the Court

44.  Between the 2 extremes of no intervention by the Court and the draconian measure of striking out a claim, there are various options.

“There are many orders that can be made before striking out should be considered. In other words, the court is not left with a choice of not doing anything at all on the one hand or striking out on the other; it isnow encouraged to consider the many possibilities that lie in between these two extremes.” (at para 33 of the Wing Fai case)

45.  Striking-out is not a proportionate punishment for the single incident of non-compliance in this case.

46.  Refusal to extend the time may be equivalent to striking out. Mr Mak submits that it is not necessarily so because the 2 sets of proceedings can go on as if there had been no consolidation.  I cannot agree.  Once the learned Master has ordered consolidation, the proceedings shall carry on under the directions given. Otherwise it will render all measures of case management otiose. 

47.  On the other hand, simply extending time for filing the consolidated statement of claim without penalty undermines the authority of a court order. I am therefore minded to impose conditions for the extension: Order 1B, rule 1(2)(a) and (3).

48.  An unless order is not realistic since the draft CSOC is ready for filing.  I am minded, rather, to deprive the Plaintiff of interest. By wasting 11 months, the Defendants might be put to extra interest payment should the Plaintiff win the action.  It is no answer that the Defendants will have enjoyed longer use of the money and possession of the mortgaged properties because they have not yet been adjudicated to be liable.  I therefore order that the time extension should be on condition that the Plaintiff should be deprived of interest for the 11 months.

Consequential Directions

49.  The Defendants have asked for 6 weeks to file the defence (an extra 14 days over those prescribed by the Consolidation Order).  Given the health condition of D3, I will grant this time as asked for and he must meet the time.

50.  From 24.11.2010 to the date of this judgment, 13 months have been wasted.  Future extensions of time may be considered in this light.

51.  Further, given the deteriorating eye condition of D3, it will be best to tailor make a timetable (that takes into account the need for surgery and recuperation) and fix a milestone date to ensure that things progress expeditiously.  I therefore direct the parties to jointly submit, by 20 January 2012, a timetable for my approval on the papers.

Costs

52.  The Plaintiff is the overall winner and should prima facie be entitled to costs. However, I have taken into account that the costs of the time summons itself should have been to the Defendants anyway.  It was not unreasonable for the Defendants to contest the application and I have eventually deprived the Plaintiff of interest.  A hearing was inevitable.  Taking a broad-brush view, I order the Defendants to bear 60% of the Plaintiff’s overall costs, to be summarily assessed.

Conclusion

53.  There was inordinate and inexcusable delay on the part of the Plaintiff but prejudice to the Defendants was insubstantial and not such as to deprive him of a fair trial.  There was no abuse of process by the Plaintiff.  The Defendants bore part of the responsibility for the delay.  It is not appropriate to strike-out the action, it being too draconian in view of a single incident of non-compliance on the part of the Plaintiff.  Penalty in the form of deprivation of interest will be sufficient.  I therefore order as follows:

(1)  The application for striking out for delay is dismissed.  

(2)  There be an extension of time for the Plaintiff to file and serve the consolidated statement of claim by 4:00 pm on 6 January 2012.

(3)  D3, D6 and D7 do file and serve their defence within 6 weeks thereafter.

(4)  The parties are to jointly submit by 20 January 2012 a timetable, which should include a proposed milestone date, for my approval on the papers.

(5)  The extension of time is subject to the condition that the Plaintiff shall be deprived of interest on any judgment sum it shall recover for the period from 24.11.2010 (1^st day after expiry of time under the Consolidation Order) to 25.10.2011 (the date of the time summons).

(6)  There be an order nisi that 60% of the Plaintiff’s overall costs under the 2 summonses, including the costs of the hearing and related costs reserved, be borne by D3, D6 and D7, to be summarily assessed.

(7)  There shall be summary assessment of costs on the papers on 20 January 2012 at 9:30 am.  No attendance is required. The Plaintiff shall file and serve its statement of costs by 12 January 2012.  The D3, D6 and D7 shall file and serve their grounds in opposition by 19 January 2012.

54.  I thank counsel for their assistance.

[1]             D4, one of the original applicants, is no longer proceedings with the striking out application.