CHOW HOW YEEN MARGARET AND OTHERS v. WEX PHARMACEUTICALS INC AND ANOTHER

HCA 1035/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1035 OF 2011

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BETWEEN

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D E C I S I O N

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INTRODUCTION

1.  Two summonses have been taken out by the two defendants (collectively “this application”).  The relief sought is similar.  In short, they seek to:

(a)  discharge the ex parte order dated 22 June 2012 whereby the master extended the validity of the writ herein (“the writ extension order”);

(b)  discharge the ex parte order dated 17 October 2012 whereby the master granted leave to serve the 1^st defendant (“WEX Canada”) out of the jurisdiction;

(c)  set aside service of the writ herein on (1) the 2^nd defendant (“WEX Hong Kong”) on 26 September 2012, and (2) WEX Canada on 28 November 2012;

(d)  disallow the amendment of the writ herein and statement of claim herein.

BACKGROUND

2.  This action is concerned with the plaintiffs’ earlier purchase of the shares of WEX Canada, a public company listed in Canada which operated a pharmaceutical business. The plaintiffs suffered financial loss because of a substantial drop in the share price.  They claim that the loss was caused by the defendants’ fault.

3.  A more detailed background has been given by the court of appeal in a judgment in Winland Enterprises Group Inc v Wex Pharmaceuticals Inc and Another, CACV 154/2011 (29 March 2012).  I will gratefully quote therefrom:

“2. Winland is a company incorporated in the British Virgin Islands as a corporate vehicle for a group of investors represented by Margaret Chow (‘Chow’) and Timothy Ma (‘Ma’).

3. WEX is a listed company incorporated in Canada engaged in the pharmaceutical industry. It has a number of wholly owned subsidiaries, including WEX Medical Limited incorporated in Hong Kong (‘WEX HK’), GlobalMed Corporation incorporated in West Indies (‘GlobalMed’) and Acro Pharm Corporation incorporated in Barbados (‘Acro Pharm’), the 2nd defendant herein. WEX also has 97% interest in Nanning Maple Leaf Pharmaceutical Company Limited (‘Nanning’) incorporated in the People’s Republic of China (‘the PRC’).

4. WEX and the above subsidiaries shared some common staff. Frank Shum (‘Shum’) was until 16 August 2005 a shareholder, director, president and chief executive officer of WEX; a director and chairman of WEX HK; authorised person and ‘lawyer at large’ of Acro Pharm; and the chairman and legal representative of Nanning.

5. Grace Leong (‘Leong’) was a director of WEX; director and deputy manager of WEX HK and Shum’s assistant until 13 March 2006.

6. In about July 2001, Shum and Leong on behalf of WEX discussed with Chow and Ma the possibility of WEX granting exclusive distribution rights in Tetrodin for treatment for opiate withdrawal in Peru to a company to be nominated by Chow and Ma. Tetrodin, also known as Tetrodonin, is extracted from tetrodotoxin (referred to collectively as ‘TTX’). The discussion resulted in Chow and Ma agreeing to subscribe for shares in WEX through private placement (‘Share Purchase Agreement’) and in Winland entering into an agreement with GlobalMed on 5 December 2001 for sole distributorship of Tetrodin in Peru (‘GlobalMed Agreement’).

7. In about April 2003, at the request of Shum, the GlobalMed Agreement was cancelled and replaced by an agreement on identical terms between Winland and Acro Pharm (‘Acro Pharm Agreement’) on 21 May 2003.

8. On 25 November 2003, Winland entered into an exclusive distributorship agreement for Tetrodin in Peru (‘Peru Agreement’) with Forbest Medical International S.A.C. (‘Forbest’). On 12 April 2004, the Peru Agreement was transferred from Forbest to Equipos Y Medicinas S.A.C. (‘Equipos’).

9. With the documentation provided by WEX, Equipos obtained Sanitary Registry Authorisation from the health authority in Peru on 24 February 2004 which permitted and licensed Equipos to import and sell Tetrodin manufactured by Nanning in Peru. The authorisation commenced on 5 February 2004 and expired on 5 February 2009.

10. In August 2004, WEX, Winland and Equipos jointly arranged clinical testing of the effectiveness of Tetrodin for treatment of opiate withdrawal precipitated by cocaine abuse in Peru. Pursuant to the arrangement, Winland placed a small purchase order with Acro Pharm for Tetrodin on 25 August 2004. The Tetrodin was never delivered. In January 2005, Shum requested to delay the commencement of the Acro Pharm Agreement. Winland agreed.

11.   In an e-mail dated 24 April 2010, WEX informed Winland that as the final study report prepared by Ventana Clinical Research Organisation issued on 9 January 2006 concluded that the administration of Tetrodin did not attenuate withdrawal symptoms precipitated by naloxone, WEX discontinued development of Tetrodin for opiate withdrawal. WEX proposed to Winland to terminate the Acro Pharm Agreement and to dissolve Acro Pharm whose only business related to that agreement.  Winland considered the e-mail evinced an intention on the part of WEX not to be bound by the Acro Pharm Agreement and to repudiate that agreement.  Winland accepted the repudiation by WEX and Acro Pharm by filing a writ of summons with a statement of claim on 19 October 2010.”

WEX and WEX HK in the quoted passages are the same as WEX Canada and WEX Hong Kong respectively (para 1(b) and 1(c) above).

4.  CACV 154/2011 was an appeal from a decision in HCCL 4/2011 (or HCA 1573/2010).  Both the first instance court and the appellate court set aside the concurrent writ of summons and leave to serve it out of the jurisdiction on WEX in Canada.  These proceedings will be called “the earlier action” below.

5.  The procedural steps relevant to this application are:

(1)  the writ together with statement of claim was issued on 21 June 2011;

(2)  (as stated above) the writ extension order was made on 22 June 2012;

(3)  the writ together with amended statement of claim (which added WEX Hong Kong as the other defendant) was issued on 17 September 2012;

(4)  the said court document was served on WEX Hong Kong at its registered office on 26 September 2012.

ISSUES IN THIS APPLICATION

6.  In relation to the writ extension order, the defendants contend that:

(a)  there was no good reason for making the writ extension order;

(b)  this is particularly so because the plaintiffs’ claim herein is (or at least highly arguably is) time-barred by the time of the writ extension order;

(c)  there has been non-disclosure of material facts when the plaintiffs applied ex parte for the writ extension order;

(d)  the amended claim was only raised (and the amended writ was only served on WEX Hong Kong) after the amended claim has been (or at least highly arguably has been) time-barred;

(e)  the amended claim (deceit) has not been adequately pleaded.

These will be discussed under separate sub-headings below.

(a)   Good reason to extend validity of writ?

7.  A writ is valid for 12 months from its issuance: RHC Ord 6 r 8(1).  The court’s power to extend the validity of a writ is conferred by Ord 6 r 8(2).

8.  It is trite law the court’s power to do so should only be exercised cautiously (Hong Kong Civil Procedure 2013, Vol 1, para 6/8/3).  A summary of the manner in which the power is to be exercised can be found in Pacific Electric Wire & Cable Co Ltd and Another v Hu Hung Chiu and Others [2011] 1 HKLRD 1000:

“15. Order 6 Rule 8 empowers the Court to extend the validity of a writ where there is ‘good reason’ to do so. See Kleinwort Benson Ltd. (also known as The MYRTO) [1987] AC 597 (622G-623D) (Lord Brandon).

16. The Court first asks whether ‘the failure to serve a writ within its normal validity period is the result of a choice’ and (if so) ‘whether the choice was made for a good reason’. This means that ‘no discretion to extend the writ would arise unless the choice [deliberately not to serve the writ within its validity period] was made for a reason which is at least capable of amounting to a good reason’. See Chow Ching Man v. Sun Wah Ornament Manufactory Ltd. [1996] 2 HKLR 338 (CA), at 344C (Bokhary JA).

17. Extending the validity of a writ therefore entails a two-stage process. At stage one, a plaintiff must show ‘matters which could, potentially at least, constitute good reason for extension’. At stage two, the Court weighs all relevant factors (including the ‘good reason’ established at stage one and the relative hardships to the parties involved) so as to determine whether the writ should be extended as a matter of discretion. See Yip Kam v. Zhongshan Foodstuffs & Aquatic Import & Export Group Company Ltd. of Guangzhou [2010] 2 HKLRD 914 (at para 39) (Le Pichon JA).

18. In Kleinwort Lord Brandon distinguished 3 categories of situation. In Category 1 were cases in which a plaintiff applied for extension of a writ within the period of its validity and before the expiry of the limitation period for the causes of action pleaded. In Category 2 were cases in which a plaintiff applied for an extension after expiry of a writ’s validity but before expiry of the operative limitation period of the causes of action pleaded. In Category 3 were cases in which a plaintiff applied for an extension after expiry of the writ and the operative limitation period. The point of Lord Brandon’s distinction was to stress that it would be unlikely for there to be good reason for extension in Category 2 cases and even less likely for there to be so in Category 3 cases.” (emphasis supplied)

9.  This application does not concern a category (1) case (a plaintiff applying for writ extension within its validity period).  It is either a category (2) case (according to the plaintiffs) or a category (3) case (according to the defendants).

10.  In either case, the first of the 2-stage test requires the plaintiffs to show “good reason” for the extension.  To understand if they have done so, a few words need to be spent on the nature of their claim (in both the original writ and the amended writ).

11.  In the original writ (issued on 21 June 2011 (before the leave in the earlier action to issue and serve the concurrent writ was set aside on 20 July 2011)), the cause of action was pleaded as a breach of the agreement entered into between the plaintiffs and WEX Canada (presumably in July 2001; but in any event before December 2001) by failing to inform the plaintiffs that Nanning had in fact (i) lost its claim for ownership of the patent to use TTX and (ii) ceased the production of TTX.  It was also pleaded that if the plaintiffs had been so informed they would not have purchased the WEX Canada shares (which subsequently substantially diminished in value).

12.  In the amended writ (issued on 17 September 2012 (some one year and 2 months after the original writ)), the cause of action was pleaded as misrepresentation.  The plaintiffs accuse that Shum and/or Leong, acting for the defendants, induced the plaintiffs to buy WEX Canada shares by misrepresenting that WEX Canada owned or controlled the TTX patent.

13.  In this application, save as regards one matter (which will be discussed further in para 17 to 19 below), the plaintiffs accept that they became aware of the facts relevant to the claim based on breach of agreement (original writ) and that based on misrepresentation (amended writ).

14.  In particular, a judgment was pronounced by the Beijing Higher People’s Court on 27 November 2001 (“the Beijing judgment”) (the Beijing judgment and other related facts have also been set out in the court of appeal’s judgment of 29 March 2012).  It was held that the TTX patent was jointly owned by unrelated third parties.  Based on the holding, the State Intellectual Property Office in the Mainland changed the patent registration from Nanning to the said third parties in October 2002.

15.  Because of an unsuccessful attempt to adduce fresh evidence for use at the hearing of CACV 154/2011 (29 March 2012), it is obvious the plaintiffs were well aware of the Beijing judgment by September 2011.  The plaintiffs’ decision to search for the Beijing judgment was apparently prompted by their knowledge (in about May 2010) of WEX Canada’s public announcement that it had lost ownership of the TTX patent because of a court decision.

16.  Thus, the plaintiffs would have already known of the above for about:

(i)   9 months by 22 June 2012 (the date of the writ extension order);

(ii)  12 months by 17 October 2012 (the date of the order to serve WEX Canada out of the jurisdiction);

(iii)  11 months by 26 September 2012 (the date of service on WEX Hong Kong);

(iv)  13 months by 28 November 2012 (the date of service on WEX Canada).

17.  The matter which the plaintiffs rely on as “good reason” is that they were unaware until May 2012 that GlobalMed was never incorporated.  As can be seen from the passages in the CACV 154/2011 judgment (quoted above):

(1)   GlobalMed was one of WEX Canada’s wholly-owned subsidiaries;

(2)   Winland entered into an agreement with GlobalMed in December 2001 for the sole distributorship of TTX in Peru;

(3)   the said sole distributorship agreement was cancelled and replaced in April and May 2003 by an agreement on identical terms between Winland and Acro Pharm.

18.  The plaintiffs argue that GlobalMed being a fictitious company:

“… is a very important ingredient in the Fraud and highly relevant to this Action because [WEX Canada] and/or [WEX Hong Kong] knowing that GlobalMed is a fictitious company actively used it in the Fraud to enter into [various agreements] … ” (para 19, plaintiff’s skeleton submissions).

19.  I disagree.  First, as the defendants correctly point out, the GlobalMed agreement has been cancelled and replaced by the Acro Pharm agreement.  Thus, GlobalMed ceased to play any role in the plaintiffs’ dealings with WEX Canada after April/May 2002.

20.  Secondly, whether GlobalMed is an essential ingredient of the plaintiffs’ claim based on misrepresentation (it cannot properly be an ingredient of the breach of agreement claim; and the plaintiffs do not so contend) can be tested by postulating two alternative hypotheses:

(a)   if the TTX patent were in fact owned by WEX Canada (through its subsidiary) but GlobalMed was known to the plaintiffs to have never been incorporated;

(b)   GlobalMed were in fact incorporated but the plaintiffs had known that the TTX patent was not owned by WEX Canada.

21.  It is reasonable to expect that the plaintiffs would still have purchased the WEX Canada shares and entered into the Acro Pharm agreement under hypothesis 20(a) above.  It is also reasonable to expect that the plaintiffs not to do so under hypothesis 20(b) above.

22.  By reason of the above matters, I do not consider the plaintiffs have established any good reason for the validity of the writ to be extended.

(b)  Was the claim time-barred?

23.  Where there is a dispute regarding a cause of action may be time-barred, whether to give leave to amend was recently discussed by the court of appeal in Global Bridge Assets Ltd and Others v SHK Securities Ltd [2012] 4 HKLRD 474.

24.  After reviewing earlier decisions such as:

(1)    Extramoney Ltd and Another v Chan, Lai, Pang & Co [1992] 1 HKLR 244 (leave to amend should be given where the limitation defence is arguable);

(2)    Sun Focus Investment Ltd v Tang Shing Bor [2012] 1 HKLRD 738 (leave to amend should be refused where there is an arguable limitation defence),

the court of appeal concluded in Global Bridge Assets:

“… Whether the limitation period of six years should run from the date on which the cause of action accrued as provided in section 4(1) [of the Limitation Ordinance (Cap 347)] or from the date of discovery of the fraud or concealment as provided in section 26(1) is immaterial. What matters is whether the plaintiffs here can show that the defendant has no reasonably arguable defence of limitation to the new claim and so would not be prejudiced by the relation-back rule … ” (emphasis supplied) (para 24 thereof).

25.  It cannot be disputed that more than 6 years have elapsed between the plaintiffs’ latest WEX Canada share purchase (29 October 1994) and the date of the writ herein (21 June 2011).  The plaintiffs rely on s 26(1), Cap 347 which provides:

“… where in the case of any action for which a period of limitation is prescribed by this Ordinance, either-

(a) the action is based upon the fraud of the defendant;

(b) any fact relevant to the plaintiff's right of action has been deliberately concealed from him by the defendant; or

(c) the action is for relief from the consequences of a mistake,

the period of limitation shall not begin to run until the plaintiff has discovered the fraud, concealment or mistake (as the case may be) or could with reasonable diligence have discovered it” (emphasis supplied).

26.  The plaintiffs accept in some of the affidavits filed on their behalf that the news release of WEX Canada on 29 June 2005 disclosed (among other things):

“… based on [the Beijing judgment] the Chinese Patent Office …has changed [the] registered ownership of [the TTX patent] … from [Nanning] to [other third parties] … ” (para 20, Chow’s 2^nd affidavit; para 14, Chow’s 3^rd affidavit).

Thus, on the basis the news release would be information which could with reasonable diligence have been discovered, the 6-year limitation period would have expired by 29 June 2011 (after the date of the writ herein (21 June 2011)).  The expiry date was accepted by the plaintiffs (para 5, Chow’s 2^nd affidavit).

(c)  Was the amended claim time-barred?

27.  As stated above:

(a)   WEX Canada’s said news release (29 June 2005) would be information which could with reasonable diligence have been discovered by the plaintiffs (or at least arguably be such information);

(b)   the amended claim was served (on the defendants’ solicitors on 18 September 2012; on WEX Canada out of the jurisdiction on 28 November 2012) and WEX Hong Kong was served on 26 September 2012.

Consequently, the 6-year limitation period (which would have expired by 29 June 2011) has expired before service was effected.

28.  Insofar as the plaintiffs should contend that the limitation period only begins to run since they obtained a copy of the Beijing judgment (in September 2011) (para 33 and 34, plaintiffs’ skeleton submissions), it is at least arguable that the limitation period should run from the date of WEX Canada’s said news release instead.

29.  By reason of the court of appeal’s conclusion reached in the Global Bridge Assets decision, the plaintiffs’ said contention cannot constitute a valid ground.

(d)   Was amended claim properly pleaded?

30.  The defendants claim that the amended claim has not been adequately pleaded.

31.  Because of the conclusions reached under the other sub-headings above (and under “Material Non-disclosure” below), it is strictly unnecessary to determine this aspect.

32.  For completeness, I will observe that I am inclined to agree with the plaintiffs that the amended claim has been properly pleaded and the defendants’ claim has no merit.

(e)  Material non-disclosure

33.  The defendants also complain that the plaintiffs have failed to make full and frank disclosure.  This is founded on the plaintiffs’ failure (in the affidavit dated 13 June 2012) to disclose in their ex parte application for the writ extension order: the matters summarized in para 13 to 16 and 26 to 27 above were not mentioned therein.

34.  I do not accept the plaintiffs’ argument that the matters which have not been disclosed were irrelevant matters; nor do I accept that they did not appreciate these were important (para 51 and 54, plaintiffs’ skeleton submissions).

WAS THIS APPLICATION MADE IN TIME?

35.  Ord 20 r 4(1) stipulates:

“Within 14 days after the service on a party of a writ amended under rule 1(1) or of a pleading amended under rule 3(1), that party may apply to the Court to disallow the amendment” (emphasis supplied).

36.  Based on the above provision, the plaintiffs argue that this application was made out of time.

37.  The defendants’ application to disallow the amended writ has practical significance only if they should fail their application to discharge the writ extension order and the order for leave to serve out of the jurisdiction, and to set aside the service on the defendants.

38.  Because of the conclusions reached under the sub-headings above, the defendants have succeeded in that part of this application. There is thus no need to consider this aspect.

CONCLUSION

39.  By reason of the above matters, my discretion should be exercised to:

(1)  discharge the writ extension order;

(2)  discharge the order for leave to serve out of the jurisdiction;

(3)  set aside service of the writ on the defendants.

OTHER MATTERS

40.  The parties’ submissions also mentioned various other points.  These have not been expressly set out or dealt with in the above headings and sub-headings.  This is so only because of the need to balance between the length of the decision and its comprehension.  It does not mean those other points are thought to be irrelevant (or have been overlooked).  To avoid doubt, those other points have also been considered.

COSTS ORDER

41.  The parties agree that the costs of this application should follow the event.  There will accordingly be a costs order that those costs be paid by the plaintiffs to the defendants to be taxed if not agreed.

42.  I consider summary assessment of costs to be appropriate.  The above costs shall thus be so assessed.  The defendants have already lodged with court and served a statement of costs at the end of the hearing on 6 February 2013.  It therefore remains for the plaintiffs to lodge with court and serve a statement of objections within 7 days from today (if they so wish).  Costs will be assessed on the basis of these documents.