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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INTRODUCTION

1. These are the appeals of the 2^nd plaintiff (“MGB”) against the master’s order dated 13 March 2013.  The master ordered MGB to provide security for costs of the 1^st and 3^rd defendants (respectively “Yih” and “MGHK”) up to and including trial.

2. The amounts of security which MGB has been ordered to provide are $1 million (in relation to Yih) and $1.3 million (in relation to MGHK).

BACKGROUND

3. The 1^st plaintiff (“Miranda”) is a Brazilian businessman in the gemstone business.  MGB is an overseas company effectively controlled by Miranda.  He and Yih became (and used to be) good friends.  MGHK was incorporated in 2004 to carry out an alleged oral agreement whereby gemstones would be sent by Miranda for processing (and sale afterwards).  MGHK would be paid a commission for the sale of the processed gemstones.

4. The claim brought against Yih and MGHK in this action is in essence:

(a)   Yih’s breach of the alleged agreement and an account of Miranda’s entitlement arising out of MGHK’s business;

(b)   damages for breach of the alleged agreement;

(c)   MGHK’s return of MGB’s gemstones earlier consigned to MGHK (or damages for conversion/detinue).

5. Yih denies the alleged agreement, or that he personally converted (or caused or procured MGHK to convert) the gemstones. Yih also alleges that he is not the beneficial owner of MGHK and never had control of it.

6. MGHK also denies the alleged agreement (and the rest of the plaintiffs’ claim).  While not disputing it has the plaintiffs’ gemstones in its possession, MGHK denies that it is liable to return them unless and until MGB has fully paid the costs for processing (cutting and/or treating) the gemstones.  It claims to be able to retain the gemstones either contractually or pursuant to a common law lien.  Further, MGHK is entitled to set-off the value of the gemstones against the debt owed by MGB to MGHK (the latter’s claim being bigger than the former’s).

THE APPEALS

7. The applicable legal principles are trite and will not be repeated.  For ease of reference, those principles have been summarized in Hong Kong Civil Procedure 2013, Vol 1, para 23/3/3 to 23/3/7 and 23/3/14.

8. The nature of an appeal from the master to the judge is also trite; it is by way of a complete re-hearing: Hong Kong Civil Procedure 2013, Vol 1, para 58/1/2.

(a)  In relation to MGHK

9. In the context of these appeals, MGB contends that, as a result of the recent discovery of documents by MGHK, it is beyond argument that there will be a credit balance in MGB’s favour in relation to its claim against MGHK:

(1)   on MGB’s own case, the gemstones retained by MGHK should be worth about US$2.5 million;

(2)   the 2-page document based on which MGB will seek to prove the value of its gemstones was prepared by a Mainland company controlled by Yih.  There is no evidence adduced by the defence to dispute the accuracy of that document;

(3)   as regards the expenses allegedly incurred, the only purported documentary proof adduced by the defence was a “statement of account”;

(4)   even if the said “statement of account” were an accurate record, a detailed analysis will show that the items therein attributable to the expenses for processing the gemstones amount to about US$321,000 only (the total amount allegedly due to MGHK is about US$1.5 million).

10. Based on the above, MGB argues that MGHK is in effect holding assets the net worth of which is about US$2.2 million (if the gemstones are worth US$2.5 million), or at least about US$750,000 (on MGHK’s valuation of the gemstones allegedly at about US$1 million).

11. MGB contends that, such being the case:

(a)   it is highly likely a monetary judgment will be entered in its favour against MGHK.  In other words, it has a claim of substance against MGHK despite MGHK’s counterclaim;

(b)   in any event, it is unjust to order it to provide security for MGHK’s costs (the quantum of which was fixed by the master at $1.3 million) in view of the net credit balance.

12. In relation to para 11(a) above, MGHK responds that its case is not based purely on a set-off of cross-debts.  Rather, it relies on an alleged contractual arrangement whereby it is not liable to return the gemstones unless and until MGB has paid the processing expenses in full.  I agree with MGHK that this is a dispute which cannot be satisfactorily resolved in these appeals.

13. On the other hand, as regards para 11(b) above, MGHK’s only substantial answer is that the gemstones are not liquid assets which can readily be converted into cash.  However, this remains as an allegation not supported by evidence.  I therefore find that MGHK is holding assets the value of which is sufficient to provide security for the costs it may incur in this action.

14. In view of the matters set out above, I agree with the contentions of MGB set out in para 11(b) above and disagree with those of MGHK.

(b)  In relation to Yih

15. MGB argues that its claim against Yih’s depends much on the outcome of its above claim against MGHK.  It also points out that, in his pleadings, Yih effectively leaves the matter to MGHK because it is part of his case he never had control of MGHK.

16. MGB therefore contends that Yih’s costs for defending the claim against him would totally overlap with those of MGHK.

17. Yih disagrees with the above contention:

(1)   he should be entitled to challenge MGB’s claim against MGHK on his own because it is part of MGB’s case that he was a party liable for MGB’s alleged loss (jointly and severally with MGHK);

(2)   in addition, he would have to incur costs to dispute MGB’s case that he had control (or had been a beneficial owner) of MGHK, and/or he caused or procured MGHK to convert the gemstones;

(3)   if he succeeds in his defence, he may well be awarded the costs of the action and not merely the costs of one or more of the above issues (Re Elgindata (No 2) [1993] 1 All ER 232, 237; La Chemise Lacoste SA v Crocodile Garments Ltd [2000] 4 HKC 317, 327; Hong Kong Kam Lan Koon Ltd v Realray Investment Ltd (No 4) [2005] 4 HKC 162, para 13).

18. I consider Yih’s above analysis to be correct. It is true that, should MGB’s claim against MGHK fail, its claim against Yih should also fail.  But the reverse may not be true (in other words, a successful claim against MGHK does not necessarily lead to a successful claim against Yih).

(c)   Skeleton bills of costs

19. Relying on the decision in Hero Rich International Ltd v Benefun International Holdings Ltd and Others HCA 1433/2009 (11 November 2009), MGB accuses Yih and MGHK to have abused the court process; their applications should be dismissed for that reason alone.

20. The court observed in the Hero Rich decision that:

(a)   the application for security for costs was based on an estimated10-day trial;

(b)   at the time of the application, however, not even the defence had been filed;

(c)   no reason had been given for the said trial estimate;

(d)   the amount of security sought was nearly $8 million;

(e)   however, only $52,000 costs had been incurred by then.

Further to the above, the skeleton bill of costs was “singularly unhelpful”: there was no breakdown of the cost items which made up the relatively large total sum, nor was there explanation for the time-estimates.

21. In the circumstances outlined above, the court said in the Hero Rich decision:

“… In my judgment, the court when faced with an unhelpful — and especially overly ambitious — skeleton bill is entitled in an appropriate case to dismiss the application on this ground alone” (para 39).

22. In these appeals,

(1)   the defendants each provided a skeleton bill the amount of costs of which totalled more than $4 million;

(2)   the security ordered by the master was substantially less (about one-quarter of the amount in the skeleton bill).

MGB therefore asks that these appeals be allowed for the reasons given in the Hero Rich decision.

23. I do not agree.  The master noted the following:

(a)   the skeleton bills of cost had been inflated;

(b)   but they had not been inflated to the extent that justifies outright dismissal.

24. In agreeing with the master, I have taken into account matters such as: this action has progressed much further than has happened in the Hero Rich decision; there is no suggestion that the trial estimate of 10 days is exaggerated; all parties concerned have indicated they would be represented by leading and junior counsel at trial; the skeleton bills contain a breakdown of the individual cost items.

(d)  Quantum

25. Because the appeal against MGHK will be allowed (and the order for security will be set aside), it is strictly unnecessary to consider this aspect in relation to MGHK.  I shall do so for completeness.

26. I also agree with the master’s assessment on the amount of security in relation to both defendants.  The matters I have taken into account in so concluding include those set out in para 24 above.

27. Further, as a “broad-brush” approach, the amounts of security ordered by the master appear to be “within range” for costs usually incurred for similar civil litigations (both in terms of magnitude and issues in dispute) from the discovery of documents up to and including trial.

CONCLUSION

28. The appeal in relation to Yih is dismissed; but the appeal in relation to MGHK is allowed.  The master’s order in relation to the security for costs for MGHK is accordingly set aside.

OTHER MATTERS

29. The parties’ closing 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

30. The parties accept that costs of these appeals should follow the event.  There will accordingly be an order that the costs of:

(1)   the appeal in relation to Yih be paid by MGB to Yih;

(2)   the appeal in relation to MGHK be paid by MGHK to MGB.

31. Two other matters are disputed:

(a)   costs of MGHK’s application before the master;

(b)   MGB’s application for a certificate for the attendance of two counsel at these appeals.

32. In relation to para 31(a) above, MGHK argues that MGB has relied on a different case (based on different materials) than when it appeared before the master.  While that is true, the “new” materials relied upon originated from MGHK, but were only made available after the master’s hearing.  With that in mind, it is appropriate to order that MGHK also pays MGB the costs of its application before the master.

33. I agree with the defence as regards para 32(b) above.  I have been greatly assisted by leading counsel.  But, on a party-and-party taxation basis, these appeals do not justify the court attendance of two counsel to be certified.

34. I consider summary assessment of costs to be appropriate.  The above costs shall thus be so assessed.  For this purpose:

(1)   the receiving party be at liberty to lodge with court and serve a statement of costs within 7 days from today;

(2)   the paying party be at liberty to lodge with court and serve a statement of objections within 7 days thereafter.