JOSE MIRANDA DA COSTA JUNIOR AND ANOTHER v. LORENZO YIH AND OTHERS

HCA 156/2010

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 156 OF 2010

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D E C I S I O N

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Background

1.  There is before me an application by the 3^rd defendant in this action to amend its Defence and Counterclaim.  The amendment would involve the addition of five persons, who are not hitherto parties to these proceedings, as defendants to counterclaim.

2.  In response, the plaintiffs have taken out a summons for an order that, if the 3^rd defendant’s application is allowed, the counterclaim against the 1st plaintiff and the additional parties be tried separately from the rest of the action.  The plaintiffs also apply for an order that the action be assigned to a single judge for all interlocutory applications.

3.  To put the arguments before me in their context, I need to describe the claims and counterclaims already made, as well as those proposed to be made, albeit in broad terms. 

4.  The background to the 1st plaintiff’s claim was summarised by Deputy Judge Le Pichon in her decision dated 26 March 2013 in this action on an appeal relating to the 1st plaintiff’s application for specific discovery against the 1st defendant, which I gratefully adopt and set out as follows:

“2. The 1^st plaintiff is a Brazilian merchant engaged in the business of supplying high end gemstones and is the founder and owner of the 2^nd plaintiff, a Brazilian company. This action arises from the 1^st plaintiff’s claim that in or around September 2003 he and the 1^st defendant orally agreed to jointly set up and operate in partnership a wholesale business of gemstones in Hong Kong through a Hong Kong company to be formed. The 1^st plaintiff would manage and develop the business and its goodwill by making use of his expertise and experience and the 1^st defendant would provide financial and local support in Hong Kong including office premises and staff.

3. The 1^st defendant is the major beneficial owner, the Chairman and CEO of LJ International Inc (“LJI”), a NASDAQ listed company engaged in the manufacture and marketing of jewellery.

4. Pursuant to the agreement, the 3^rd defendant was incorporated in Hong Kong on 7 January 2004. Two shares were issued: one was issued to Li Fung Ying, Cam and the other to Wan Po Ming, Flora. They were employees of LJI and held the same on trust for the 1^st plaintiff and the 1^st defendant.

5. On 31 December 2006, the two issued shares in the 3^rd defendant were transferred to a BVI company beneficially owned by the 1^st defendant called Oceandrift Group Ltd (“Oceandrift”) and on 6 November 2008, Oceandrift transferred those shares to the 2^nd defendant. The 1^st plaintiff’s case is that those shares continued to be held on trust for the 1^st plaintiff and the 1^st defendant.

6. The 1^st plaintiff actively participated in the business of the 3^rd defendant from 2004 onwards until his exclusion from the 3^rd defendant’s office on 5 November 2009. The 1^st plaintiff gave instructions to staff who took orders from him and was treated as one of two bosses. He was also a director from August 2007 until 10 November 2009. He and the 1^st defendant were each paid a monthly shareholder’s bonus of $120,000 until December 2008 when the 3^rd defendant’s cash flow situation no longer permitted that.

7. At all material times the 1^st defendant controlled a company called Goldleaves Trading Ltd (“Goldleaves”) which had an office at Unit C, LG/F, Phase 3, Kaiser Estate, 18 Man Lok Street, Hunghom (“the premises”). The 3^rd defendant operated from the premises and staff of Goldleaves was seconded to and placed under the payroll of the 3^rd defendant. Rental for the use of the premises, office furniture and supplies were paid to a subsidiary of LJI at the request of the 1^st defendant.

8.  It is the 1^st plaintiff’s case that on 5 November 2009, the 1^st defendant repudiated the agreement.  When the 1^st plaintiff returned from Shenzhen that day he found out that Mr Osorio Mendes Quintino Neto who had worked with the 1^st defendant for many years caused the 3^rd defendant’s office to close and compelled all staff to leave.  The 1^st plaintiff was thus excluded from the 3^rd defendant’s office.  He was also denied access to the 3^rd defendant’s computer system and was no longer able to access his e-mail accounts or the 3^rd defendant’s server.”

The 1st plaintiff’s claim against the 1st and 2nd defendants

5.  The 1st plaintiff claims that based on his oral agreement with the 1st defendant, the 2nd defendant held the shares in the 3rd defendant on trust for them equally.  The 1st plaintiff says that the agreement was repudiated by the 1st defendant, who completely excluded him from the 3rd defendant, which repudiation the 1st plaintiff accepted.  Accordingly:

(1)  the 1st plaintiff claims, inter alia, declarations that the 1^st defendant had repudiated the agreement, that the 1^st plaintiff and the 1^st defendant were at all material times the beneficial owners of the 3^rd defendant, that the 2^nd defendant held one of the two shares in the 3^rd defendant on trust for the 1^st plaintiff; and

(2)  the 1st plaintiff also claims an account be taken of all the assets of the 3rd defendant and of the fair value of his 50% shareholding or interest in the 3rd defendant, an order that the 1st defendant pay an amount equal to such value to him, and damages for wrongful repudiation of the agreement.

6.  In his Defence to the 1st plaintiff’s claim, the 1st defendant denies the oral agreement and denies ever being a beneficial owner of shares in the 3rd defendant.  The 2nd defendant has not acknowledged service of the claim nor has it filed a Defence.  So far as this claim is concerned, no relief is sought against the 3rd defendant though as a party it will be bound by any finding made by the Court on the ownership of its shareholding.

The 2nd plaintiff’s claim against the 3rd defendant

7.  The plaintiffs’ case is that the 2nd plaintiff is a Brazilian company owned by the 1st plaintiff.  The 2nd plaintiff had from time to time since 2005 sent gemstones to the 3rd defendant for sale on consignment.  The 3rd defendant (under the 1st defendant’s control) still has in its possession gemstones belonging to the 2nd plaintiff in the total value of approximately US$2.5m, but has failed to return the gemstones despite demand.  Accordingly the 2nd plaintiff sues the 1st and 3rd defendants for the delivery up of the gemstones or damages for conversion.

The defendants’ defence to the 2nd plaintiff’s claim

8.  In his Defence, the 1st defendant generally denies wrongful conduct and says that the allegation of possession of the 2nd plaintiff’s gemstones should be addressed by the 3rd defendant.

9.  In the 3rd defendant’s Defence, it admits possession of the 2nd plaintiff’s gemstones but does not admit their particulars and denies their alleged values.  The 3rd defendant says it paid the expenses of cutting and treating the gemstones as requested by the 2nd plaintiff and that the 2nd plaintiff was accordingly indebted to it in the amount of such expenses.  The 3rd defendant says it was a term of the arrangement that it was not required to return the gemstones to the 2nd plaintiff until the 2nd plaintiff has paid the cutting and treating costs. Further, the 3rd defendant claims that it sold or consigned various gemstones to the 2nd plaintiff, procured various services for the 2nd plaintiff and settled sums owed by the 2nd plaintiff on its behalf, as a result of all of which the 2nd plaintiff owes it the sum of over US$1.5m.

The 3rd defendant’s counterclaim against the 1st plaintiff

10.  The 3rd defendant also counterclaims against the 1st plaintiff in its existing Defence and Counterclaim (although strictly speaking “counterclaim” is a misnomer here for the 1st plaintiff has made no claim against the 3rd defendant).  The counterclaim consists of a series of claims based on disparate transactions.  Three of these claims should be mentioned here.

(1) It is alleged that the 1st plaintiff delivered a quantity of the 3rd defendant’s gemstones to a customer, Shrey International Ltd (“Shrey”) and was paid a cash advance of US$30,000 by Shrey for which the 1st plaintiff failed to account to the 3rd defendant.

(2) The 3rd defendant claims that at various times up to November 2009, it consigned various gemstones to Triangulo Gemas & Joias (“Triangulo”) with an outstanding value of US$358,707.63.  In January 2010, the 1st plaintiff wrongfully directed Triangulo to return the gemstones to himself, and had failed to account to the 3rd defendant for them and had converted them to his own use.

(3) The 3rd defendant claims that it consigned various gemstones to Azizi Enterprises Co Ltd (“Azizi”) with an outstanding value of US$32,887.  Azizi had returned the consigned stock to the 1st plaintiff, who had failed to account for them and converted them to his own use.

The 1st plaintiff’s reply and defence to the 3rd defendant’s counterclaim

11.  In the plaintiffs’ Reply dated 23 July 2010, in response to the claim about Shrey, the 1st plaintiff says:

(1) The 3rd defendant had purchased gemstones from Monetary Institute SA (“MISA”) for US$120,000 but having paid US$20,000 lacked the funds to pay the balance.  As a result, gemstones were delivered to Shrey as security for a loan of US$30,000 to the 3rd defendant.  The 1st plaintiff received the loan proceeds from Shrey whereupon he paid them directly to MISA on the 3rd defendant’s behalf.

(2) MISA continued to press for payment of the balance of the price (in the sum of US$70,000) and in December 2009 the 1st plaintiff was forced to pay US$22,000 out of his own pocket in partial payment to MISA.

12.  In reply to the claim concerning Triangulo, the 1st plaintiff denies that he directed Triangulo to return, or that Triangulo did return, any consigned gemstones to himself.

13.  In reply to the claim concerning Azizi, the 1st plaintiff also denies that Azizi returned any consigned gemstones to himself.  In particular, he says that Mr Azizi had told him on 11 April 2010 that the gemstones were still in the possession of Azizi.

Proposed amendments to the 3rd defendant’s counterclaim against the 1st plaintiff

14.  The main substance of the 3rd defendant’s proposed amendments to its counterclaim is as follows:

(1) In relation to Shrey, the 3rd defendant wishes to add two new claims.

(a) The 3rd defendant says Shrey has failed to pay US$90,000, which is the balance of the price of gemstones consigned to Shrey after deducting the cash advance of US$30,000 paid to the 1st plaintiff.  Shrey has also failed to return the gemstones.

(b) The 3rd defendant says that in May and October 2009, the 1st plaintiff wrongfully caused two consignment notes in the amounts of US$53,601.4 and US$232,912 to be issued to Shrey and gemstones were taken from the 3rd defendant’s inventory pursuant to those consignment notes.  The 3rd defendant says the 1st plaintiff took those gemstones for himself without passing them to Shrey and without paying for them.  Alternatively, Shrey received the gemstones and failed to pay for them or return them.  Accordingly the 3rd defendant wishes to sue the 1st plaintiff and Shrey in the alternative.

(2) In relation to Triangulo, the 3rd defendant wishes to add two new claims:

(a) The 3rd defendant wishes to claim against Triangulo in the alternative for the consigned gemstones of the value of US$358,707.63, a claim in respect of which has already been pleaded against and denied by the 1st plaintiff: see paragraph 10(2) above.

(b) The 3rd defendant wishes to add a new claim against Triangulo alone for failure to repay a debt of US$231,508.72 arising from the sale of gemstones.

(3) In relation to Azizi, the 3rd defendant wishes to add an alternative claim to that referred to in paragraph 10(3) above, alleging that if the outstanding consigned gemstones had not been returned by Azizi to the 1st plaintiff, then Azizi had wrongfully failed to return them to the 3rd defendant.

(4) The 3rd defendant wishes to add a new claim that in relation to various gemstones consigned to Nevestones Ltda (“Nevestones”) with an outstanding value of US$143,385.27 and in relation to an outstanding invoice sum of US$64,195.55 owed by Nevestones, either

(a) the 1st plaintiff wrongfully directed Nevestones to return the gemstones and pay the outstanding invoice sum to himself and failed to account to the 3rd defendant for them; or

(b) Nevestones has failed to return the gemstones and pay the outstanding invoice sum.

(5) The 3rd defendant wishes to add a new claim that in relation to various gemstones consigned to Hatta New World Company Limited (“Hatta”) with an outstanding value of US$1,374,228.50, either:

(b) the 1st plaintiff wrongfully directed Hatta to return the gemstones to himself for which he failed to account to the 3rd defendant; or

(c) Hatta has failed to return the gemstones.

Discussion

15.  It can be seen that the majority of the proposed amendments take the form of alternative claims against third parties.  Essentially, the 3rd defendant says that certain of its gemstones consigned to third parties are unaccounted for: either the 1st plaintiff took possession of them from the third parties and failed to hand them over to the 3rd defendant, or the third parties had kept them and failed to return them to the 3rd defendant.

16.  On behalf of the plaintiffs, Miss Lisa Wong SC opposes the 3rd defendant’s application to amend and to join new parties principally on the grounds of delay and prejudice.  She further submits that, if the amendments and joinder are allowed, the entire counterclaim against the 1st plaintiff as amended (though not the 3rd defendant’s counterclaim against the 2nd plaintiff) should as a matter of case management be severed from the action and be proceeded with separately.

17.  It is convenient to deal with delay and prejudice first before discussing how the applications should be disposed of.

Delay

18.  There is no dispute that the proposed amendments and joinder are late in an objective sense, having regard to the fact that the action was begun by the plaintiffs on 1 February 2010.  The 3rd defendant’s summons was taken out almost three years afterwards.

19.  But more importantly, the application is also late in the sense that the amendments and joinder were only proposed very long after the 3rd defendant had the requisite knowledge of the facts relating to these claims.  One example suffices to illustrate this, as the rest follows a similar pattern[1].

(1) On 5 March 2010, soon after the Writ herein was issued, Messrs Kennedys wrote on behalf of the 3rd defendant to Triangulo claiming that it had failed to return consigned gemstones of the value of US$358,707.63 and had failed to repay a debt of US$231,508.72, i.e. precisely the claims that the 3rd defendant now wishes to add to its counterclaim as against Triangulo (see paragraph 14(2) above).

(2) On 6 March 2010, Triangulo replied in a one-line email:

“As per [the 1st plaintiff’s] instructions, already return all goods to his hands on Jan/2010.”

(3) On 13 April 2010, Messrs Kennedys wrote to Triangulo stating that unless it was able to provide documentation within 7 days to show the debt had been paid and consignment returned, they had instructions to commence legal proceedings in Brazil without further notice.  In the event, however, no such proceedings were commenced.

(4) On 28 May 2010, the 3rd defendant filed its Defence and Counterclaim herein, making a counterclaim against the 1st plaintiff in relation to the gemstones consigned to Triangulo (see paragraph 10(2) above).

(5) On 23 July 2010, the plaintiffs filed their Reply and Defence to Counterclaim vis-à-vis the 3rd defendant, wherein the 1st plaintiff contends that he did not direct Triangulo to return, nor did Triangulo return, any consigned gemstones to himself (see paragraph 12 above).  By then, the 3rd defendant knew very well the 1st plaintiff’s stance, which was opposite to that of Triangulo.  That the 3rd defendant fully appreciated what course was open to it at that point was evident from the next communication.

(6) On 23 August 2010, Messrs Kennedys sent an e-mail to Triangulo, stating:

“In your email of 6 March 2010, you stated that you returned the consigned gemstones to Mr Miranda personally on his instruction in January 2010. In our letter of 13 April 2010, we asked you to provide us with documents confirming the contents of your email. We have unfortunately not received a response to our request for this information.

As a result of your email, Miranda Gems (HK) Ltd has sued Mr Miranda for the value of the gemstones you returned to him as they belong to Miranda Gems (HK) Ltd.  However Mr Miranda has in official court documents denied that he directed you to return the gemstones to him and denied that the gemstones were ever delivered to him.”

          Messrs Kennedys then asked for information about the alleged delivery of the gemstones to the 1st plaintiff and stated that if the request was ignored, their client might be forced to conclude that the 1st plaintiff’s version was correct and pursue Triangulo for the gemstones.

(7) Inexplicably, instead of any action, there then followed more than two years of silence and inaction with respect to Triangulo.

(8) It was only on 17 September 2012 that Messrs Kennedys wrote to Triangulo again, stating that unless Triangulo within 14 days made payment or provided information and documents relating to the alleged delivery of the gemstones to the 1st plaintiff, they would instruct a law firm in Brazil to commence legal proceedings against Triangulo without further notice.  Still, however, no such proceedings were commenced against Triangulo in Brazil or otherwise.

(9) It was only on 11 January 2013 that the Summons for leave to amend was taken out, annexing the draft Defence and Counterclaim.

20.  Meanwhile, at the case management conference in this action held on 26 July 2012, there was no indication by the 3rd defendant that it intended to apply to join new parties. All that was said by the 3rd defendant about pleadings in its questionnaire was: “The 3rd defendant may need to amend the pleadings pending review of the Plaintiffs’ discovery documents.”  Plainly this could not have been a reference to the amendments now sought.

21.  The 3rd defendant first indicated to the plaintiffs that it intended to apply to amend its counterclaim and join new parties by a letter dated 31 October 2012.  However, no draft pleading was supplied.  It was only at the second case management conference held on 20 December 2012, when the master proposed to impose an unless order setting a deadline for the exchange of witness statements, that Messrs Kennedys handed up a copy of a draft Amended Defence and Counterclaim to the master, but not to the plaintiffs.  Even now, neither the plaintiffs nor this Court know whether that draft is the same as the one attached to the present Summons.

22.  Given the history above, I turn to see what explanation the 3rd defendant has offered to justify the indulgence it seeks from the Court.  The only explanation given is that the 3rd defendant’s solicitors have been liaising since early 2010 with more than 20 debtors of the 3rd defendant to chase for outstanding or unpaid consignments and debts.  It is said that:

“This process of corresponding with debtors, many of whom are overseas, take time and we have made persistent efforts to chase the debtors and have threatened legal action against all debtors. Some of them have never responded while others have only started to respond very recently. We do not, and cannot be expected to know the position of each debtor until they respond to our letters. Therefore, we have been waiting for an appropriate time to make an application for amendment so as to capture all potential counterclaims … It would be more cost effective to make one application for multiple amendments, rather than multiple applications for multiple amendments.”

23.  In my view, this does not bear scrutiny.  First, the correspondence with the five intended new defendants to counterclaim, as set out in paragraph 19 above, hardly justifies the statement that “persistent efforts” have been made to chase the debtors.  Secondly, the position of those intended defendants were already evident in 2010 and had not changed since.  There is nothing to explain the two-year hiatus before the 3rd defendant’s interest in pursuing these defendants apparently revived.

24.  The matter does not stop there.  Given the delay already incurred before the application for amendment and joinder was taken out, one would have thought that the 3rd defendant would try its best thereafter to expedite matters relating to its application. I regret to have to say that this has not been the case.

25.  First, after the master gave directions on the 3rd defendant’s summons including that it be adjourned for argument before a judge with 3 hours reserved, the 3rd defendant took no steps to fix the date.  When the plaintiffs suggested the parties attend the Clerk of Court to fix a date, Messrs Kennedys replied that since it was the 3rd defendant’s summons, “we will write to the parties to schedule an appointment” (original emphasis) to fix a date, “after all of the affidavits … have been properly filed and exchanged between the parties”.  Had the 3rd defendant had its way, this summons might have had to be heard after the court vacation this year.  Its conduct does not seem to me to be consistent with a desire to see matters expeditiously dealt with.

26.  Secondly, the plaintiffs’ solicitors wrote to Messrs Kennedys asking for details of place of incorporation and mode of service of the intended new defendants to counterclaim. This is relevant to the issue of how long it would take to effect service on those defendants and therefore to the discretion of the court on the 3rd defendant’s summons and the further conduct of the proceedings.  (I was told at the hearing that service of the Writ on the 2nd defendant, a company incorporated in Anguilla, took one year.)  Messrs Kennedys responded:

“As for your numerous queries about our effecting service out of the jurisdiction on these intended Defendants …, you can rest assured that reasonable and necessary enquiries and steps have been made and will be taken to do so. Such matters are, of course, matters for us and there is no basis or reason for you to raise such questions.”

27.  This is, to say the least, unhelpful.  Even now, there is no information about the precise legal status of the intended defendants to counterclaim, when an application could and would be made for leave to serve them out of the jurisdiction if the 3rd defendant’s summons is granted, and how long actual service on them would be likely to take.

28.  Thirdly, it appears that the 3rd defendant has taken no steps to bring its application for joinder to the notice of any of the five intended defendants to counterclaim.

29.  In an application for joinder, the useful and desirable practice, as stated in Hong Kong Civil Procedure 2013 para 20/8/4 p 452, is that:

“Where it is clearly realised from the start, that on an application for leave to amend to add a defendant there would be reasoned opposition to the making of the order, the more convenient course to follow is to serve the summons on the proposed party to be added, since this would enable the matter to be dealt with directly before the joinder takes place, rather than to obtain the order in the absence of the added defendant who would have to give notice of intention to defend and then apply under O.12 r.8 to be dismissed from the action (per Walton J in Gawthorp v Boulton [1979] 1 WLR 268; [1978] 3 All ER 615).”

30.  Nothing seems to have been done by the 3rd defendant in this regard.  The fact that four of the five intended defendants to counterclaim are located overseas is no excuse for not at least notifying them of the application, sending them the papers and ascertaining their stance.  Quite apart from whether they wish to be “lumped together” in an action much of which has nothing to do with them, there is the question of whether they will contest the jurisdiction of the Hong Kong courts or otherwise contend that Hong Kong is not the appropriate forum.

31.  In my view, the 3rd defendant’s conduct of these proceedings does not inspire any confidence at all that the counterclaim, if expanded in the way sought, would be expeditiously proceeded with in keeping with the spirit of the civil justice reform.

Prejudice to the plaintiffs

32.  Miss Wong submits that the amendment and joinder would take the proceedings “back to square one” and cause great delay to the resolution of the plaintiffs’ claims.  First, the 3rd defendant would have to apply for leave to serve the proceedings on Triangulo and Nevestones (both in Brazil), Azizi (in Thailand) and Shrey (in India).  No such application has been made at the same time as this joinder application.  Assuming leave is obtained, the counterclaim will have to be actually served in those jurisdictions, which from experience can be expected to take a substantial amount of time. There may then be applications by those defendants to counterclaim to set aside service or stay the counterclaim on the ground of forum non conveniens.  When the counterclaim has passed these hurdles and got properly on its foot, there will need to be pleadings and discovery.

33.  In this context, the 3rd defendant asserts that the existing proceedings are “not as far progressed as the Plaintiffs would have it”.  In the supporting affirmation for the 3rd defendant’s application, the solicitor in charge observes that “[a]s can be seen from the intended amendments to the Defence & Counterclaim, the disputed issues between the parties are still in the process of being properly formulated”.  This is misconceived.  The pleadings have long closed. The 3rd defendant cannot assert the issues are still being formulated simply because it has made a late application for amendment of pleadings to add new claims.

34.  Then it is said that discovery is incomplete.  But it appears that the only outstanding matter in that regard (subject to the parties’ continuing obligation to make discovery) is that the 1st defendant has applied for leave to appeal against Deputy Judge Le Pichon’s decision to allow the appeal from the master and grant the rest of the 1st plaintiff’s application for specific discovery.  There is also an unless order for compliance with the discovery order by 20 May 2013.  The 1st and 3rd defendants’ assertion that discovery is incomplete seems to me to have little substance.

35.  The 3rd defendant further says experts have not yet been engaged and an application for leave to adduce expert evidence has not yet been issued.  It is true that the 3rd defendant indicated an intention in October 2012 (but has not yet apparently taken out a summons) to seek leave to file an expert’s report.  But the deadline imposed by the Court for the parties to apply for directions on expert evidence has passed without either party applying for such directions.  I find it surprising that the 3rd defendant saw fit to rely on its own dilatoriness to assert that these proceedings have not progressed very far.  As I understand their position, the plaintiffs will oppose any attempt by the defendants to introduce expert evidence.

36.  Mr Maurellet submits that there is still an interlocutory application outstanding, namely, the 2nd plaintiff’s appeal against an order for security for costs against it, set down to be heard in September this year, and that “little will be in reality done” before that appeal is heard and determined.  That however seems to me to be a discrete matter, not representative of the general progress of the action.  I see no reason at all why the action (for example the exchange of witness statements) should not proceed pending that appeal.

37.  It is true that witness statements have not yet been exchanged.  But again, but for the 3rd defendant’s intimation of its intention to apply for amendment and joinder, it seems that the master would have made an unless order at the case management conference on 20 December 2012, and witness statements would in all likelihood have by now been exchanged.

38.  Allowing the amendment and joinder would therefore very substantially set back the action, even though it has not been set down for trial.

39.  In addition, Miss Wong submits that an account as to the assets of the 3rd defendant must be carried out sooner rather than later.  In that context she says that the 3rd defendant had been a profitable concern but in December 2010, the 3rd defendant produced a set of draft financial statements for the year 2009 which shows it to have made a loss of over HK$76 million.  That has caused the 1st plaintiff great alarm.

40.  Further, there is evidence that the 1st defendant had been making representations in the industry to the effect that the 1st plaintiff was a mere employee and never an owner of the 3rd defendant.  It is not unreasonable for the 1st plaintiff to wish to have his claim resolved and his position vindicated as soon as practicable.

The Applications

41.  On balance, notwithstanding the above matters, I consider that I should grant leave for the 3rd defendant to amend its counterclaim and to join the additional parties. Not granting leave would mean the 3rd defendant might have to bring a fresh action against those parties.  But since most of the claims against them are alternative to those against the 1st plaintiff, it seems to me I should give leave for joinder in the existing counterclaim.

42.  However, because of the delay of the 3rd defendant and to avoid prejudice to the plaintiffs as described above, I think there is much to be said for the plaintiffs’ summons that the 3rd defendant’s counterclaim against the 1st plaintiff and the additional defendants by counterclaim should be severed from the rest of the action and be proceeded with separately.  Under O. 15 r. 5, the Court has wide powers to order severance.

43.  An important feature here of the 3rd defendant’s counterclaim against the 1st plaintiff (and the intended additional parties) that lends itself to being severed is that it is self-standing and has no factual or legal overlap with the plaintiffs’ claims. Of the two limbs in O.15 r.3(1) which governs counterclaims against additional parties, the real ground for seeking the joinder is the first limb, i.e. that the additional parties are said to be “liable to [the 3rd defendant] along with the [1st] plaintiff in respect of the subject-matter of the counterclaim”.  There is no basis to rely on the second limb, i.e. claims against the additional parties for “any relief relating to or connected with the original subject-matter of the action”.

44.  Mr Maurellet does not dispute this, and accepts in his skeleton argument that “the Counterclaim is not directly related to the so called shareholders’ dispute in the main action”.  But he says that the 3rd defendant’s counterclaim would be relevant to the credibility of the 1st plaintiff in his claim against the 1st defendant, since the 1st plaintiff alleges an oral agreement.  He relies on Lin Man Yuan v Kin Ming Holdings International Ltd [2012] 3 HKLRD 550 to submit that given the resolution of the 1st plaintiff’s claim against the 1st defendant will involve consideration of the credibility of the 1st plaintiff, it is inappropriate to sever the 3rd defendant’s counterclaim against the 1st plaintiff from the main action because the 1st plaintiff’s credibility cannot be satisfactorily assessed without an investigation of all the disputes.

45.  However, first, Lin Man Yuan is materially very different from the present case because, as Deputy Judge Mimmie Chan (as she then was) stated in her judgment at para 20: “the counterclaim is not only relevant to the question whether Lin and Huang should be believed in the evidence on the issues and subject matter of the main action, but is related to the essential question of whether Lin is entitled to the relief which she seeks as plaintiff in the main action”.  Here, it is common ground that the 3rd defendant’s counterclaim against the 1st plaintiff is not in substance related to the plaintiffs’ claims.

46.  Secondly, Mr Maurellet himself recognises that his submission is not in itself a sufficient reason against severance.  He submits that in the circumstances it is “premature” to consider severance of the counterclaim.

47.  Thirdly, although the 1st plaintiff’s claim involves an oral agreement, there appears to be significant documentation in support of it, and in contradiction of the 1st defendant’s case, so much so that on 13 March 2013, the master dismissed the 1st defendant’s application for security for costs against the 1st plaintiff on the ground that the 1st plaintiff has a “strong and genuine claim” against the 1st defendant.  There is no appeal against that decision by the 1st defendant.

48.  There is no rule of law or practice requiring proceedings relevant to a person’s credibility to be tried together.  The powers of joinder and severance are exercised on wider considerations.  Under O.15 r.5(1), if “it appears to the Court that the joinder of causes of action or of parties, as the case may be, may embarrass or delay the trial or is otherwise inconvenient, the Court may order separate trials or make such other order as may be expedient”.  Under r. 5(2), if “it appears … the subject-matter of the counterclaim ought for any reason to be disposed of by a separate action, the Court may order the counterclaim to be struck out or may order it to be tried separately or make such other order as may be expedient”.

49.  The action was started in February 2010 and real progress ought to be made.  In my view, hiving off the 3rd defendant’s counterclaim against the 1st plaintiff and the additional parties will enable the remainder of the action (which is relatively advanced) to proceed free from the shackles of being linked to the 3rd defendant’s counterclaim which, because of the 3rd defendant’s own choice, is only being fundamentally reconstituted now, over three years after the action was begun, and which the 3rd defendant has shown little interest in pursuing expeditiously.

50.  Mr Maurellet says it is premature to consider severance now.  He submits that the appropriate course is to permit the joinder, adjourn the plaintiffs’ summons for severance sine die, and then wait and see what happens next, e.g. whether the additional defendants to counterclaim “would even choose to defend or respond to the Counterclaim and how they would advance their case”.  There might have been more force to this submission had the 3rd defendant taken steps to ascertain the stance of those additional parties to the counterclaim and notify them of the application for joinder. But, as stated in paragraph 30 above, none of that was done.

51.  Furthermore, the action is near the critical stage of exchanging statements (which should have happened but for the 3rd defendant’s application) and, shortly thereafter, getting set down for trial.  Once the joinder is allowed, however, the whole action, if not severed, would be immediately, and very considerably, delayed.  It could easily be many, many months, before all the additional defendants are actually served, all the jurisdictional issues cleared and substantive responses to the counterclaims filed.

52.  In these circumstances, I consider that the most appropriate order to make by way of case management is as follows:

(1) The 3rd defendant be allowed to amend its Defence and Counterclaim and join the additional defendants to counterclaim.

(2) The 3rd defendant’s counterclaim against the 1st plaintiff and the additional defendants to counterclaim be tried separately.  To this end, the parties will be at liberty to proceed further with the rest of the action including the exchange of witness statements.

(3) There will be liberty to apply.  Directions need to be given for the further conduct of both the 3rd defendant’s counterclaim against the 1st plaintiff and the additional defendants to counterclaim, as well as the rest of the action.  An early date is to be given for such directions hearing.

(4) The application by the plaintiffs for the action to be assigned to a single judge for all interlocutory applications will be adjourned to that directions hearing.

53.  The draft Amended Defence and Counterclaim annexed to the 3rd defendant’s summons is defective in form in that the parties to the counterclaim as shown in the title fail to include the plaintiffs and the claims being made in the alternative are not clearly specified as such.  While I am in principle prepared to give leave to amend, the 3rd defendant should provide a revised draft pleading that cures those defects before leave is actually granted to amend in the form of the revised draft.

54.  There will be an order nisi on costs as follows:

(1) There be no order as to the costs of the application to amend the Defence and Counterclaim. The costs of and occasioned by the amendments be to be plaintiffs in any event.

(2) The costs of the joinder of the intended defendants by counterclaim be costs in the cause of the counterclaim against those defendants by counterclaim.

(3) As for the plaintiffs’ summons dated 5 February 2013, the costs of the application for severance be to the plaintiffs in any event.  The costs of the application for a single judge to deal with all interlocutory applications be in the cause.