TIKEN LTD v. BRIERLEY INVESTMENTS LTD

HCCL 87/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMMERCIAL ACTION NO.87 OF 2000

(formerly HCA 5776/2000)

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J U D G M E N T

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The applications

1. There are cross-applications before the court.

2. By summons dated 7 October 2003 the plaintiff asked that the action now be set down for trial, with 20 days reserved, and by summons dated 21 October 2003 the defendant asked for leave to re-amend its Defence in terms of the draft annexed to the summons.

3. In the circumstances of this case the result of the application on the summons to re-amend undoubtedly impinges upon and affects the plaintiff's application to set down. Hence the necessity to resolve the re-amendment issue at the outset.

4. When the defendant's summons was first called on, with the defendant's consent Mr Shieh SC for the plaintiff opened and outlined his objections to the re-amendments as then proposed. At the conclusion of his argument Mr Au for the defendant applied for an adjournment in order to consider, and if necessary further to amend to meet the criticisms thus outlined by the plaintiff. Hence the application was stood over for some three weeks.

5. As a consequence a further draft re-amendment to the Defence has been proposed, replacing the original draft, and the substantive argument upon the defendant's summons has concentrated upon this substitute document, which is dated 6 February 2004.

6. The re-amendment debate cannot sensibly be understood without brief reference to the history of events. The matter is larded with detail, although it strikes me that the salient point which ultimately has emerged for decision is easy to identify.

The factual background

7. This court already has had occasion briefly to consider the history of this case : see the Judgment dated 5 May 2003 upon an earlier specific discovery application, wherein a related aspect to that which presently is before the court was decided against the defendant, and the discovery application refused. That judgment speaks for itself, and concluded with the observation that it was appropriate to proceed with this action without delay. Since that time, experts' reports have been exchanged, as have witness statements, and save for the present application to re-amend, the case is in a fit state to be set down for trial. I do not wish to be unkind, but there is a certain element of déjà vu about the present situation. Absent what is another belated procedural argument, this case would already have been allotted a date for trial; indeed I am reminded that it was originally listed for trial for 7 days in September 2001, although those dates were vacated.

8. But to revert to the broad substance of the dispute. This litigation concerns a claim arising from an Agreement of Sale and Purchase dated 6 June 1994 whereby the 1st plaintiff, 'Tiken', agreed to purchase from a company called Cabprice Limited all the issued share capital of a company called Downer Group Limited. Tiken is the wholly owned subsidiary of the 2nd plaintiff herein, 'Paul Y', whilst Cabprice, the vendor of the shares, is owned by the defendant herein, Brierley Investments Limited.

9. As the name implies, Downer Group had a number of companies within its umbrella; one of these was a company called Downer and Company Limited, which was a participant in a joint venture, the Ting Kau Contractors Joint Venture, to which Government had awarded the design and construction contract for the Ting Kau Bridge and Approach Viaduct. Downer and Company had a 25% stake in the Ting Kau Joint Venture; subsequently, when Paul Y was added as a joint venturer with 12%, the combined interest was increased to 34%.

10. In any event, the present dispute has as its origin certain losses suffered by the TKJV for the period 1 April 1997-31 March 1998. In broad terms, the way in which the contractual scheme worked, as set out in the S&P Agreement of June 1994, was that the provisions relating to the purchase by the plaintiffs of the Downer Group contained an underwriting mechanism by which losses suffered for any particular period on any 'Zero Margin Contract' (which the plaintiff asserts the Ting Kau Bridge contract to be) then on foot concerning any member of the Downer Group would be made good by the defendant, Brierley, the owner of the nominal vendor of the shares, Cabprice. The concepts of 'Annual Cost' and 'Gross Contract Income' are contractually defined within the Agreement; thus, Brierley agreed to make good any deficit (of cost over income) in Zero Margin Contracts to which Downer and Company was party (see Clause 14.5).

11. That which this court will be required to deal at trial is the plaintiff's claim for the sum of approximately HK$192.687 million which represents the pro-rated share, attributable to Downer and Company, as a 25% member of the TKJV, relating to losses alleged to have been incurred on the Ting Kau Bridge Contract for 1997-1998. Brierley disputes the allegation of loss for this financial year, and disputes that the computation of Gross Contract Income and Annual Cost have been done correctly, an aspect of the case that is to be the subject of expert accountancy evidence, the issue being whether the correct methodology was adopted in the computation of the relevant figures arrived at on the basis of a pool of contractually defined data (see Clause 14.2 (A)).

12. I note that the earlier specific discovery application, which was refused, had sought to obtain documentation to go beyond and behind the pool of data as contractually so specified. In particular, the defendant had wished to review the base documentation underpinning a claim which had been made to Government by the Joint Venture in the sum of HK$496 million, which had been treated in the accounts for 1996/97 as income of HK$480 million, which entry thereafter had been reversed in the 1997/98 accounts, there being substituted therefor an income figure of HK$78 million, which was the sum at which the Joint Venture had settled its claim of HK$496 million.

13. However, whereas the specific discovery application had sought to focus on the sum of HK$480 million booked as income as being too high, the present re-amendment application attacks the problem from the other end of the spectrum, so to speak, and focuses on the settlement figure of HK$78 million as being too low. Nevertheless, whether the high or the low road be taken, the point to which the defendant is seeking to get is effectively the same one, namely that as the result of these matters, and the manner in which the figures have been treated in the accounts, an unnecessarily heavy loss for 1997/98 has been created for which the defendant, Brierley, should not now be required to indemnify either Tiken, the 1st plaintiff, or in the alternative, the 2nd plaintiff, Paul Y.

14. Against this backdrop, therefore, I turn to consider the specific re-amendments now introduced by the defendant in its new draft.

The proposed re-amendments

15. Not all the amendments are objected to by the plaintiff. In summary, only the proposed amendments at paragraphs 18A-18E, paragraph 19 (in so far as it cross-references to paragraphs 18A-18E), paragraph 27, and a newly added Counterclaim against the 2nd plaintiff, Paul Y, at paragraphs 28-29, are in dispute.

16. The thrust of the proposed pleading invokes (at paragraph 18A) the terms of Clause 14A.2 of the S&P Agreement of June 1994, wherein the 2nd plaintiff was at all material times under a duty to use all reasonable endeavours to or to cause its subsidiaries to maximize the Gross Contract Income and to control the Annual Cost for each relevant Annual Period so as to minimize any payments to be made by the defendant under Clause 14.5 of the Agreement. For present purposes let me shortly call it 'the reasonable endeavours' point.

17. Shorn of detail, the invocation of this plea has led to debate in two specific areas :

(i)

first (at paragraph 18B) the purported implication of a term "by reason of business efficacy and obvious inference from the contract" that in the event of the 2nd plaintiff failing to discharge its contractual duty pleaded in paragraph 18A, the defendant, Brierley, will not be liable for any payment to Tiken, qua purchaser of the Downer Group shares, under Clause 14.5 of the Agreement; and second, the plea (at paragraph 18C) that in breach of its contractual duty the 2nd plaintiff, Paul Y, failed to use all reasonable endeavours to or to cause its subsidiaries to maximize the Gross Contract Income for the 1997/98 Annual Period.

18. The plaintiff objects to both assertions, although at bottom it seems to me that the only important issue is that of the alleged breach. If there was no argument on the validity of the assertion as to breach of contractual duty, it is neither here nor there whether, in addition to the construction of six express contractual provisions pleaded in paragraph 18B, an implied term additionally is invoked to substantiate the allegation that failure by Paul Y to use its "reasonable endeavours" leads to the result that Tiken's claim to payment under Clause 14.5 is tainted by the 2nd plaintiff's breach of duty (and indeed is asserted to be not only tainted but extinguished altogether). It is hard to imagine that the court at trial would be unduly exercised by this line of argument, whether in the context of the alleged implied term or in terms of the true construction of the express provisions of the contract as are prayed in aid, but in the context of an amendment debate such as this it is not necessary to reach a concluded view on what is purely a matter of legal argument.

19. It is, however, not possible to view this plea in isolation. It is irrevocably bound up with the assertion as to breach. And it is here that Mr Shieh for the plaintiff mounts his main attack in resisting these amendments. In a nutshell he makes two principal points (and several subsidiary ones, which buttress his argument). For present purposes, however, reference to the main attack will suffice.

20. Mr Shieh says that the particulars of the alleged breach constitute no more than a narrative of events, and that the sole pleaded basis for the plea of breach by Paul Y of its contractual obligation to use its "reasonable endeavours" is to be found within paragraph 18C at particular (k), namely the fact that the claim made by the Joint Venture to Government in the sum of HK$496 million was settled for HK$78 million, or 16% of the originally claimed amount. He says that this fact in itself cannot bespeak a failure to use 'reasonable endeavours' on the part of the 2nd plaintiff, as now is asserted. His theme was that there could be a number of perfectly proper reasons why a particular claim is settled for a specific sum - for example the initial amount claimed may have been strategic, matters might have occurred during the course of a claim to change its complexion and so forth - and it is not a reasonable inference that a settlement at very much below the sum claimed resulted from a lack of reasonable endeavours. In other words, the defendant had adopted a classic 'bootstraps' approach, namely the assertion, without more, of a primary fact as evidencing or constituting a breach, with a view to obtaining discovery and thus to 'fish' for something that the defendant may chance upon to bolster the case it wishes to run. As such, Mr Shieh maintained, this not only was not permitted under the rules, but also was intrinsically unfair.

21. Which brings me to the second main line of attack. If this pleading (which in itself was the second attempt on this application) were allowed, said Mr Shieh, the 2nd plaintiff would be embarrassed in the true pleading sense, in that it would not know the case it had to meet. Subparagraph (k), containing the assertion of the fact of settlement at 16%, further asserted that the plaintiff had failed to use all reasonable endeavours to maximize the Gross Contract Income for the period "by pursuing the claims to obtain the maximum payment or by achieving a better settlement thereunder". Putting to one side the absurd assertion that unless the claim was recovered in full there would have occurred a breach as pleaded, Mr Shieh asked rhetorically, where were the goalposts in this case? What is it that it is said would have been a better settlement - 24%, 36%, 45%? - and what is it precisely that it was said the 2nd plaintiff had failed to do, or cause to do in this process, whether by itself or through its subsidiaries? Nor should it be forgotten, Mr Shieh submitted, that the currently pleaded assertion was made against the factual backdrop wherein the settlement was a settlement of a claim by the Ting Kau Joint Venture as a whole, of which the plaintiffs were but a part, and a non-controlling part at that.

22. The Commercial Court is not generally attracted to what often are dismissed as mere 'pleading points', although this description in itself covers a number of possibilities. However in this particular case it seems to me that the submissions made on behalf of the 2nd plaintiff possess considerable force in terms of the basic fairness of a litigation process within which the common law pleadings system continues to play a fundamental part.

23. On behalf of the defendant Mr Au, as author of this revised draft pleading, had inherited a difficult task, and clearly had gone as far as he felt able in putting this case forward. This, he said, was the best that he could do on the basis of the information available to him, and absent discovery such as was now sought he made it plain that he was not in the position to provide any more or better particulars. Thus if the court was against him as to the sufficiency of this pleading he would, in effect, have to fold his tent in terms of this aspect of the case. His client was in a difficult position, he said, because of its lack of knowledge, although in this connection he did not dispute Mr Shieh's assertion that a representative of the defendant in fact had been on the board of the 2nd plaintiff at the date of the settlement in question. But in any event Mr Au stuck to his firm contention that without more the fact of such a relatively low settlement (HK$496 million reduced to HK$78 million) was sufficient to raise a reasonable inference in terms of lack of reasonable endeavours, and thus to get him past the front door and into the anticipated cornucopia of discovery. He did not put it quite in those terms, but at any rate that was the drift.

24. Hence, shorn of the huge amounts of detail this case has engendered, the entire re-amendment argument came down to the simple question of whether the asserted (and undisputed) fact of the settlement of the claim at HK$78 million, or 16% of the original claim, was a sufficient particular of breach in order to permit the pleading in its present form to stand. Mr Shieh said an emphatic 'no', Mr Au submitted equally forcefully that in these circumstances the response should be 'yes'. Thus the court has to come down on one side of the fence or the other, there is no middle ground.

25. I have reflected on the point, and have concluded that the arguments put forward by Mr Shieh are correct, and demonstrably so. In my view on the present formulation the defendant does not begin to get home in terms of its allegation of a breach of the obligation to use all reasonable endeavours to maximize Gross Contract Income. The fact of the settlement does not suffice, in which connection I would add, further, that I fail to see the basis of the bold plea (at particular (j)) in paragraph 18C, that the settlement agreement with Government had been entered "without any or any reasonable justification". It follows, as I think both counsel agree, that if the issue of the sufficiency of the pleading as to breach is decided against the defendant, as I have decided should be so, then the plaintiff's opposition is successful across the board in terms of those specific paragraphs to which objection was taken within the revised draft pleading, and thus none of these paragraphs will be permitted in the re-amendment.

26. A somewhat curious postscript to this decision is that this is the second occasion in the history of this case in which the defendant has sought to plead an allegation of failure to use reasonable endeavours to maximize Gross Contract Income. I have been reminded that by summons dated 7 March 2001 the defendant applied to amend its Defence, and in fact the current version of the Amended Defence was as the result of that application. All the amendments proposed in the draft amendments put forward at that time were allowed save for one, which was disallowed (see paragraph 2(a) of the Order of the court dated 23 April 2001). Mr Shieh has reminded the court that that was the proposed introduction of a paragraph 18(a) to the Defence relating to an allegation that the plaintiffs had failed to use reasonable endeavours to maximize Gross Contract Income, although he has pointed out that the particulars as then put forward to justify the plea were that in a subsequent year, that is 1998/99, there had been a profit in that Gross Contract Income had exceeded Annual Cost. I did not allow this background matter to influence my decision in this case indeed Mr Shieh did not suggest that this earlier disallowed amendment should effectively operate as a bar to the amendment application now before this court - but it does strike me that against this backdrop it is now time to put this particular matter to rest and to get on with the rest of this case.

Order

27. Consequent on the foregoing I make the following order upon the defendant's application by summons dated 21 October 2003 :

(i)	the defendant do have leave to re-amend its Defence in terms of the revised draft dated 6 February 2004, save that the proposed amendments at paragraphs 18A-18E, 19 (in so far as reference is made therein to paragraphs 18A-18E), 27 and 28-29 be disallowed, together with the prayer on the Counterclaim;
(ii)	there be an order nisi that the costs of this application, including the costs of the hearings on 26 January and 18 February 2004, be to the plaintiffs in any event, to be taxed if not agreed, and that the costs of and occasioned by the re-amendments to the Defence be to the plaintiffs in any event, to be taxed if not agreed.

In so far as may be necessary I will hear the parties as to the terms of the Order to be engrossed.

The plaintiffs' application

28. Having thus decided the re-amendment argument, there is nothing of which I am aware which now need interfere with the setting down of this case in the manner requested by the plaintiff in its summons dated 7 October 2003. The procedural history of this case does little to reinforce the notion that our legal system is able to (and often does) bring commercial matters to trial speedily and efficiently, and it is clearly necessary now to bring this case on for trial as soon as possible. It is unlikely that the court will be sympathetic to any further delay.

Order

29. I make an order in terms of the plaintiff's summons dated 7 October 2003. I assume that the current estimate of 20 days continues to hold good. In so far as any further directions are required, I will hear the parties in due course.