IGAL DAFNI v. CMA CGM SA

HCA 1185/2008

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1185 OF 2008

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And

HCA 1429/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1429 OF 2012

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REASONS FOR DECISION

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INTRODUCTION

1. On Day 8 of the trial the Defendant made an application to amend its Amended Defence and Counterclaim, and also to amend the Re-Amended Rejoinder.  Although Defendant’s Counsel, Mr Nigel Kat, had mentioned on Day 6 of the trial that he intended to apply to make an application to amend, the amendments were not in fact provided to the Court until the morning of Day 8 of the trial.  By that time, all the evidence of the factual witnesses of both parties had already been completed.

2. The proposed amendments, as they turned out, were quite different from what was previously indicated by Mr Kat orally to this Court.  In particular, for the first time in this litigation, an allegation of illegality was made in respect of the agreement (i.e. the HOA referred to below) upon which the Plaintiff sued in this action.

3. By a decision notified to the parties on 22 October 2012 (“the Decision”), I ordered, inter alia, as follows:

(1)  Leave be granted to the Defendant to amend paragraphs 26(A)(2)(d), 26(A)(3), 26(A)(7), 26(A)(13), 30(1) and 30(3) of the Amended Defence and Counterclaim  as per the draft Re-Amended Defence and Counterclaim submitted to Court;

(2)  All other proposed amendments (namely, the proposed amendments to paragraphs 4(9), 6(4), 8A, 27, 28A, 33, 34 and the Prayers) to the Amended Defence and Counterclaim are refused;

(3)  Leave be granted to the Defendant to amend paragraph 11A of the Re-Amended Rejoinder as per the draft Re-Re-Amended Rejoinder submitted to Court;

(4)  The other proposed amendments (namely, the proposed amendments to paragraph 11B) to the Re-Amended Rejoinder are refused;

(5)  Costs of and incidental to the application for amendments be reserved, and to be dealt with at the hearing of final submissions.

4. I now give my reasons for the Decision.

BACKGROUND FACTS

5. I am acutely aware that the Decision is only a decision on an interlocutory application for an amendment of the pleadings.  Although I have heard wide-ranging submissions from counsel on the law of illegality with more than 60 authorities cited to me, I do not think that it is necessary for me, in order to fairly dispose of the application and giving reasons for my decision thereon, to deal with all the submissions and authorities cited in detail.  This is, of course, without any disrespect to Counsel, for whose helpful assistance I am grateful.

6. For the purpose of giving my reasons for the Decision, it is not necessary for me to making any findings on the facts in dispute between the parties.  I have heard evidence from witnesses during the trial and have been referred to many documents in the trial bundles, but I have not yet heard the closing submissions of the parties.  I will, for the purpose of giving my reasons for the Decision, set out some of the background facts relevant only to the amendment application.

7. The Plaintiff is a Singaporean citizen and was born in Israel.  The Defendant (“Defendant” or “CMA CGM”) is incorporated in France and is a very large international shipping company.

8. The Plaintiff’s working career has been spent in the shipping industry.  He had previously worked in another shipping company called Zim Integrated Shipping Service Limited (“Zim”), which I understand is an Israeli national shipping line, and also its Hong Kong based subsidiary, a company called Gold Star Line Limited.  The Plaintiff resigned from Zim in about May 2006.

9. After resigning from Zim the Plaintiff entered into negotiation with one Mr Farid Salem (“Salem”) of the Defendant, who was interested in engaging the Plaintiff to work for one Cheng Lie Navigation Co. Ltd. (“CNC”), a Taiwanese shipping company which the Defendant was planning to acquire at the time.

10. On 21 November 2006, the Plaintiff and the Defendant entered into a Heads of Agreement (“HOA”), which provided for the Defendant to procure the employment of the Plaintiff by CNC (codenamed “Cristo” in the HOA) as its Managing Director.  Salem signed the HOA on behalf of the Defendant.  The HOA provided for the contract period to be “3 years with 6 months trial period for each party”, and that the employment was to commence “[a]s from the day CMA CGM make final irrevocable bid to Cristo shareholders”.  As Clauses 4, 5, 8, 10 and 13 are particularly relevant to the consideration of the present application (and also to the issues in the trial), I will set them out in full:

“4. Cancellation Indemnity

If after the 6 months trial period, CMA CGM or Cristo terminates the contract for any reason whatsoever, CMA CGM will pay the balance of the period remaining in installments of 3 months each, except if the termination is for reasons of willful misconduct or fraud on behalf of [the Plaintiff], or two consecutive years of losses.

Should [the Plaintiff] decide to leave before the end of the contract period, there will be non competition clause equal to six months.

5. Remuneration

350,000 USD gross per year payable over 14 months in equal installments.

Part of this amount will be paid in Taipei and part will be paid to [the Plaintiff] in a foreign account, by Cristo.

8. Profit Sharing

2.5% of net profit after tax for each fiscal year of Cristo, capped at USD1 million per year. If listing, the parties may consider to substitute the profit sharing scheme by a stock option at terms to be agreed later.

10. Temporary

The parties agree that [the Plaintiff] will dedicate his time as from November 21, 2006 to CMA CGM, in CMA CGM office in Hong Kong, for preparation of the bid to acquire Cristo or any other business CMA CGM may ask.

[The Plaintiff] will be remunerated a lump sum amount of USD30,000 payable for each month.

13.  Subject to employment contract being drawn, agreed and signed.”

11. Pursuant to Clause 10 of the HOA, the Plaintiff was in fact temporarily employed to work in the Defendant’s offices in Hong Kong and an employment contract dated 21 November 2006 (“Temporary Employment Contract”) was entered into between CGM & ANL (Hong Kong) Shipping Agencies Ltd (“CMA Hong Kong”) and the Plaintiff.  During the time when the Plaintiff was employed by CMA Hong Kong, the Plaintiff acted as its “Special Project Manager” and received payment of a monthly salary from CMA Hong Kong in the sum of HK$77,800 (US$10,000).  That amount, however, was only part of the Plaintiff’s total monthly remuneration of US$30,000 as evidenced by a memorandum dated 7 December 2006 of the Defendant, where it was provided that the balance of US$20,000 per month was to be paid by the Defendant to the Plaintiff by direct transfer to the Plaintiff’s bank account in Singapore.  That memorandum was signed by the Salem on behalf of the Defendant.

12. In regard to the payment of US$20,000 per month made by the Defendant, the Defendant had signed a consultancy agreement with one Charter Shipping Agencies (S) PTE Ltd (“CSA”) dated 21 November 2006 (“CSA Consultancy Agreement”), under which CSA would purportedly provide certain services to the Defendant in consideration of a monthly payment of US$20,000.  Although it is plain from the evidence before me that no such services were in fact provided by CSA to the Defendant, CSA would invoice the Defendant every month for the sum of US$20,000.  The Defendant, however, never in fact paid CSA on its invoices.  The only US$20,000 paid by the Defendant every month was not paid by CSA, but to the Plaintiff (by direct transfer of the sum to his Singapore bank account).  It is to be noted that the Plaintiff was not a party to the CSA Consultancy Agreement.

13. The Plaintiff’s temporary employment with CMA Hong Kong lasted until 30 April 2007 when the Temporary Employment Contract was terminated, following the successful acquisition by the Defendant of CNC in March 2007.  An employment contract dated 12 April 2007 (“CNC Employment Contract”) was entered into between the Plaintiff and CNC.  The CNC Employment Contract provided, inter alia, the agreement “shall commence on April 12, 2007 and shall have a term of three (3) years duration” and that the “salary to be paid to the Employee shall be US$10,000 per month.  Taiwan Tax shall be paid by the Employee”.

14. In accordance with the terms of the CNC Employment Contract, CNC paid a monthly salary of US$10,000 to the Plaintiff in Taiwan. The Plaintiff continued to receive payment of US$20,000 from the Defendant through direct transfer to his bank account in Singapore.

15. In December 2007 Zim commenced proceedings in Singapore against the Plaintiff making some serious allegations against him for breach of fiduciary duties (“the Zim litigation”).  The Zim litigation was ultimately resolved in favour of the Plaintiff by a judgment of the Singapore High Court, which dismissed all the claims of Zim.  But that was more than 2 years later as the Singapore judgment was only delivered in January 2010.

16. In the meantime, the Plaintiff’s employment with CNC was brought to a pre-mature end in March 2008.  The circumstances of the termination of the Plaintiff’s employment are very much in dispute.  It is the Defendant’s case that the Plaintiff voluntarily resigned from his employment and that he tendered his resignation - initially orally - to the Chairman of the Defendant, Mr Saade (“Saade”), at a meeting held in the midnight of 12 March 2008 at a room in the Evergreen Hotel Taipei.  On the other hand, it is the Plaintiff’s case that at that meeting, it was Saade who informed the Plaintiff that, in the light of the adverse publicity generated by the Zim litigation and the embarrassment it caused to the Defendant, the Plaintiff’s employment with CNC would have to be terminated.  Saade also indicated that, for the benefit of all, the termination could be dressed up as a resignation by the Plaintiff, but the Plaintiff would be paid in full all his contractual entitlements under the HOA.

17. It is not necessary for me, at this stage and for the purpose of giving reasons for the Decision, to resolve the dispute of facts between the parties, particularly as to what happened at the midnight meeting.  As said, although I have heard evidence I have yet to hear the closing submissions of the parties, and I will no doubt make the necessary findings of fact when giving judgment in the action itself. Suffice to say that the Defendant subsequently refused to make payment to the Plaintiff as demanded by him and the Plaintiff commenced the present action to claim for what he alleged to be the entitlements payable to him in accordance with paragraph 4 of HOA.  Such entitlements, according to the Plaintiff, include his accrued (but unpaid) remuneration (pursuant to Clause 5 of the HOA), and also the profit share provided for in Clause 8 of the HOA.

AMENDMENTS OF PLEADINGS: PRINCIPLES

18. The principles upon which the court proceed when faced with an application to amend the pleadings are stipulated in Order 20 of the Rules of the High Court.  There is no dispute as to the applicable legal principles in relation to amendments.  The Court may at any stage of the proceedings allow any party to amend their pleadings in any manner as may be just: O.20 r.5(1).  The Court may also allow amendments to be made for the purpose of determining the real question in controversy between the parties: O.20 r.8(1).  However, O.20 r.8(1A) provides for an overriding requirement that the Court shall not order a pleading to be amended unless it is of the opinion that the order “is necessary either for disposing fairly of the cause or matter or for saving costs.”

19. Generally speaking, the Court would allow amendments made for the purpose of determining the real question in controversy between the parties.  Leave is readily granted to enable such amendments to be made before trial unless it can be shown that the new claim based on the proposed amendments is bound to fail: see, Natamon Protpakon v Citibank NA[2009] 1 HKLRD 455, 463.  However, while amendment can be made at any stage of the proceedings, the later the stage the more scrutiny the application will be subject to.  This was so before the Civil Justice Reform (“CJR”) but all the more so now, after the High Court Rules have been amended to expressly state that the underlying objectives of the Rules are, inter alia, “to increase the cost-effectiveness of any practice and procedure to be followed in relation to proceedings before the Court”, “to ensure that a case is dealt with as expeditiously as is reasonably practicable”, and “to promote a sense of reasonable proportion and procedural economy in the conduct of proceedings” (see O.1A r.1).  Plainly, the later the application (particularly one that is made in the course, or towards the conclusion, of a trial, as in the present case), the greater the likelihood that it might delay the conclusion of the trial, and prejudice the underlying objectives of procedural economy, cost-effectiveness and expedition.  This of course does not mean that all late applications for amendments must be rejected.  It only means that the later the application, the greater the scrutiny that should be given.

20. There is also a clear difference between allowing amendments to clarify the issue in dispute and those that set up a new claim or defence for the first time.  This difference is particularly important in respect of late amendments.  An application made at trial that seeks to introduce a wholly new cause of action or defence at a late stage is more likely to cause prejudice, delay and wastage of costs.  The courts will not readily accede to such an application especially when the new claim or defence could have been raised and the need for amendments was abundantly apparently before the trial began: Tang Kam Wah v Tang Ming Yat [2003] 1 HKC 532, at 541E – 542I per Stock JA (as he then was).

21. The addition of r.8(1A) to O.20 of the Rules of High Court (L.N. 152 of 2008), requiring the Court to refuse amendments that are not necessary either for the fair disposal of the cause or matter or for saving costs, is plainly consistent with the underlying objectives set out in r.1A of the Rules.  The burden is upon the applicant to satisfy the Court that the amendments are indeed necessary for the fair disposal of the cause or matter, or for saving costs.  In general, whether prejudice (not compensatable by costs) is likely to be caused by allowing the amendments is an important consideration in the exercise of the Court’s discretion, as the presence of such prejudice is directly related to the question of “fairness” by which the Court disposes of a cause or matter.  But the mere absence of prejudice (in the sense of prejudice not compensatable by costs) does not mean that the amendments must be allowed.  For example, the prospect of costs wasted in having to adjourn a trial because of the amendments will militate against granting leave.  As the editors of Hong Kong Civil Procedure 2012 rightly observed (at 20/8/12):

“It is not the practice today, as it was in the past, invariably to allow a defence which is different from that pleaded to be raised by amendment at the end of the trial even on terms that an adjournment is granted and that the defendant pays all the costs thrown away: the grant of an amendment by the trial judge is a matter for his discretion to assess where justice lies, having regard to many factors … since justice cannot always be measured by money.”

22. The editors further observed, at 20/8/11 of Hong Kong Civil Procedure 2012, that “[p]rior to the Civil Justice Reform, the court has power to allow the amendment or re-amendment of pleadings after the conclusion of the evidence and even after the closing speeches of counsel, where no injustice or prejudice would be occasioned to either party and where it is necessary to formulate the real issues between the parties which did not appear from the original pleadings (Smith v Baron, The Times, February 1, 1991, CA).  However, with the implementation of the Civil Justice Reform and the introduction of r.8(1A), the court is to exercise this power sparingly”. Sparingly or not, granting leave to amend is ultimately an exercise of discretion by the Court, which discretion is to be exercised having regard to all the circumstances of the case but subject always to the overriding requirement stipulated under O.20 r.8(1A) of the Rules of High Court.

THE RESPONSIVE AND MISCELLANEOUS AMENDMENTS

23. Mr Kat has provided me with a draft Re-Amended Defence and Counterclaim and a draft Re-Re-Amended Rejoinder in which the amendments sought are set out (collectively “the Amendments”).

24. The Amendments may be broadly classified into 3 categories:

(a)  those amendments (“the Responsive Amendments”) which are purely responsive to the amendments made by the Plaintiff to his pleadings (for which leave was earlier granted by me at the beginning of the trial).  The Responsive Amendments relate to the amendments sought to be made to paragraphs 30(1), 30(3) of the draft Re-Amended Defence and Counterclaim and paragraph 11A of the draft Re-Re- Amended Rejoinder;

(b)  those amendments which have the effect of introducing a new defence based on illegality (“the Illegality Amendments”). The Illegality Amendments relate to paragraphs 4(9), 6(4), 8A, 27, 28A, 33, 34 and the Prayers to the draft Re-Amended Defence and Counterclaim, and paragraph 11B of the draft Re-Re-Amended Rejoinder;

(c)   various miscellaneous amendments (“the Miscellaneous Amendments”) that seek to tidy-up the Defendant’s pleadings and clarify issues, including matters which have been explored (without objection by the Plaintiff) in the evidence but which are technically not pleaded in the draft Re-Amended Defence and Counterclaim.  The Miscellaneous Amendments relate to paragraphs 26(A)(2)(d), 26(A)(3), 26(A)(7), and 26(A)(13) of the draft Re-Amended Defence and Counterclaim.

25. The Plaintiff rightly did not take any objection on the Responsive Amendments. I can see no reason why I should not allow them.

26. As to the Miscellaneous Amendments, although Mr Bartlett, counsel for the Plaintiff, indicated that he objected to them, in neither his written or oral submissions has he made any serious attempt to maintain his objection.  The subject-matters of these amendments have been explored in the evidence (most of them are in fact covered by the witness statements) without any objection by Mr Bartlett, and the Plaintiff cannot really (nor has he) complain as having been taken by surprise, despite the lateness of the application.  The Miscellaneous Amendments merely seek to clarify the issues and to tidy up the Amended Defence and Counterclaim inasmuch as the same have omitted to expressly plead the matters before.  While a lack of prejudice is not conclusive of the exercise of discretion in favour of the applicant for amendment, in the present case I am satisfied that allowing the Miscellaneous Amendments is necessary for the fair disposal of the cause or matter in this action in that it would facilitate the determination of the real controversy of the issues in this case without causing any prejudice to the Plaintiff, and without causing any disproportionate increase or wastage of costs.  I have therefore allowed the Miscellaneous Amendments.

THE ILLEGALITY AMENDMENTS

27. The amendments that Mr Bartlett opposed with much more vigor are the Illegality Amendments. The Defendant wished to plead, by way of amendments, that the provisions (in clause 5 of the HOA) for payment of part of the agreed remuneration in a foreign account and the arrangements made in respect of the CSA Consultancy Agreement were agreed at the Plaintiff’s request “in order to avoid the incidence of Hong Kong and Taiwan tax” on payments made to him pursuant to clause 5 of the HOA.  For that reason, the HOA was either an illegal contract, or alternatively a contract void and/or unenforceable for reasons of public policy.  The Defendant also wants to say that by reason of the illegality of the HOA, if (which the Defendant denies) the Plaintiff has any entitlement in law or equity to remuneration or other payments, such entitlement is limited to a claim for quantum meruit in respect of the work done by him for the Defendant during the period of his actual service only.

28. The Defendant also, by way of amendments, seeks to abandon its original counterclaim and replace in its stead a claim in restitution to recover money paid under the HOA which was alleged to be void by reasons of illegality.  I note for the record that Mr Kat has confirmed to me in the course of his submissions on the amendment application that irrespective of the success (or otherwise) of his application, the original counterclaim would be abandoned by the Defendant.

The alleged duty of the Court to carry out investigation on unpleaded illegality

29. Before I give the reasons for the exercise of my discretion, I would deal with a matter raised by Mr Kat which, if correct, may have a significant impact upon the exercise of my discretion.

30. Mr Kat argues that where an issue of illegality is properly brought to the Court’s attention, the Court is duty-bound to investigate into the illegality whether the same is pleaded or not.  He relies on North Western Salt Company Ltd v Electrolytic Alkaline Company Ltd [1914] AC 461 in support of this argument.  Mr Kat submits that as a prima facie issue of illegality has now been raised, it is this Court’s duty to allow investigation into the issue even if illegality has not been pleaded.  If Mr Kat is right in this contention, it would have a significant bearing on the exercise of my discretion; for there is no reason why – if the issue of illegality would have to be dealt with in this action anyway – I should refuse to allow the Defendant to plead the issue properly to enable the investigation to be carried out in a more structured manner by reference to the pleadings.  In other words, if the issue of illegality would have to be dealt with even without pleadings, there is no reason why the Court should refuse an offer by the Defendant to properly plead the same. 

31. I cannot accept Mr Kat’s arguments.  In my judgment, the authorities are clear that it is only in the case where the relevant contract is ex facie illegal – or if it is not, the Court is nonetheless satisfied that all the relevant facts and circumstances bearing on the question of illegality are fully known to it – that the Court becomes entitled to decide that the contract is unenforceable by reason of illegality even though the issue of illegality has not been pleaded by either party.  As Lord Moulton pointed out in the case of North Western Salt Company Ltd v Electrolytic Alkaline Company Ltd (supra, at p.476), the position:

“…… may be shortly put as follows: if the contract and its setting be fully before the Court it must pronounce on the legality of the transaction. But it may not do so if the contract be not ex facie illegal, and it has before it only a part of the setting, which it is not entitled to take, as against the plaintiffs, as fairly representing the whole setting.”

32. The proper approach which the court should adopt in a case where evidence of illegality is before the court but has not been relied on in the pleaded defence is that set out in the judgment of Devlin J inEdler v Auerbach[1950] 1 QB 359, 371, cited by Potter LJ in the case of Pickering v McConville [2003] EWCA Civ 554, at §18, as follows:

“First that, where a contract is ex facie illegal, the court will not enforce it whether the illegality is pleaded or not. Secondly, that where, as here, the contract is not ex facie illegal, evidence of extraneous circumstances tending to show that it has an illegal object should not be admitted unless the circumstances relied on are pleaded. Thirdly, that where unpleaded facts, which taken by themselves show an illegal object, have been revealed in evidence (because perhaps no objection was raised or because they are adduced for some other purpose) the court should not act on them unless it is satisfied that the whole of the relevant circumstances are before it but, fourthly, that where the court is satisfied that all the relevant facts are before it and it can see clearly from them that the contract had an illegal object, it may not enforce the contract whether the facts are pleaded or not.”

33. It is hence clear that unless a contract is ex facie illegal, evidence of its illegality is not admissible unless the circumstances or facts relied on have been pleaded.  In situations where unpleaded facts are revealed or become known to the Court (for example, through evidence admitted for some other purpose) which tend to show illegality, the Court is only entitled to act on them if it is satisfied that all the relevant facts bearing on the perceived illegality are known to it.  No finding of illegality should be made on unpleaded facts unless the Court is sure that it has all the relevant facts before it to enable it to see clearly that the contract is in fact tainted with illegality.  The following reminder of Devlin J, given in the Auerbach case (at p.371) in regard to the danger for making a finding of illegality on unpleaded facts is worth repeating:

“… the court must be satisfied of the illegality of the transaction; that means that it must be satisfied that it knows all the relevant facts. On any issue which is raised on the pleadings the court may safely assume that the relevant facts will be brought before it by one side or the other: where notice or the issue is not given on the pleadings, there is a danger that that assumption may break down, and the decision in North Western Salt Company Ltd v Electrolytic Alkaline Company Ltdis a warning against overlooking that danger.”

34. As is often pointed out, in our adversarial system the Court is not on an “independent truth-finding mission” (to use the words of Mr Bartlett in his submissions) but is there to resolve the dispute between the parties in accordance with justice and procedural fairness.  Our rules of pleadings provide an important means for safeguarding procedural fairness.  I accept Mr Bartlett’s submission that it cannot be the case that merely because a party has raised an allegation of illegality the Court’s function is thereby radically altered to that of an inquisitorial tribunal as opposed to one that resolve disputes following the normal adversarial procedure.  Where the contract concerned is ex facie illegal, the illegality concerned, as Lord Moulton pointed out in the Electrolytic Alkaline Companycase (see p. 475 of the judgment of Lord Moulton), is a question of law and the Court may safely conclude on the face of the contract that it is unenforceable for being illegal or in contravention of public policy.  Where the contract is not ex facie illegal, and the Court is not satisfied that it has all the relevant facts bearing on an allegation of illegality before it, it is highly dangerous for the Court to make findings of illegality; and in my judgment it is equally dangerous for it to abdicate its function as a Court of adjudication working within an adversarial system and take on the role of an independent investigator by embarking on an investigation based on unpleaded facts.  Illegality and breach of public policy are (except in cases where the contract concerned is ex facie illegal) issues that are often facts-sensitive, and the relevant facts have to be pleaded to enable proper findings of facts to be made (c.f. Chao San San v Worldport Industrial Limited (unrep.) CACV 158/2002, 21 March 2003, at §9 per Yuen JA).

35. For reasons above, I am unable to accept Mr Kat’s contention. Far from having a duty to carry out an investigation, this Court should not allow evidence to be adduced for the purpose of showing that the contract in question is unenforceable by reason of illegality unless the alleged illegality – and the facts in support of the same – have been pleaded. Accordingly it is wrong for Mr Kat to suggest that as the Court is bound to investigate into the question of illegality in any event, it should readily exercise its discretion to allow the pleading of the same, however late are the amendments.

No evidence of illegality in the present case 

36. In the present case, the HOA is not ex facie illegal.  Clause 5 of the HOA merely provides for an arrangement whereby part of the Plaintiff’s remuneration was to be paid in Taipei and part to his overseas account.  There is nothing ex facie unlawful for such an arrangement.  It is not illegal per se to split the remuneration in such a way that part of it is payable in one jurisdiction and part in another.  No authority has been produced by Mr Kat to show that such an arrangement is, without more, unlawful.

37. Insofar as it is argued that the performance of the HOA is unlawful, there is nothing in the evidence to show any such illegal performance.  There is no evidence at all to show, for example, that any tax evasion has occurred in Taiwan.  Merely because part of the Plaintiff’s remuneration was paid in Singapore does not mean that any illegality in terms of tax evasion has taken place, whether in Taiwan or in any other jurisdiction.  There is no evidence of any breach of Taiwan tax law.  Indeed the tax returns of the Plaintiff are not in evidence and there is nothing at all before me to show the tax treatment of the Plaintiff’s income in Taiwan, or in other jurisdictions. This is not surprising, as until the present application was made (by which time all the factual evidence had been completed), the issue of illegality was never raised and the Plaintiff had obviously prepared the case without this issue in mind.  If the allegation of illegality had been pleaded before trial, the Plaintiff could have, depending on the facts pleaded in support of the alleged illegality, called witnesses or adduce evidence to address the allegation.  One would expect that the line of cross-examination of the Defendant’s witnesses, particularly Salem (who was the person who negotiated the HOA with the Plaintiff, including his remuneration package), may have been quite different.  As it were, Mr Bartlett had not explored this issue with the Defendant’s witnesses, and by the time the application for amendments was made by Mr Kat, these witnesses had finished their evidence and were gone.

38. The Illegality Amendments sought to allege that the arrangement provided for in Clause 5 of the HOA (by virtue of which part of the Plaintiff’s remuneration was to be paid in Taiwan and part to his overseas account) and the arrangements in relation to the CSA Consultancy Agreement were agreed in order to avoid the incidence of Hong Kong and Taiwan tax.

39. The reference to the CSA Consultancy Agreement may be shortly disposed of.  The evidence at trial was quite clear that the CSA Consultancy Agreement was never intended to take effect in accordance with its terms – in particular it was never intended that CSA would provide the services purportedly stipulated in that agreement to the Defendant, and it was never intended that the Defendant would pay for any such services.  So it might be argued that the CSA Consultancy Agreement was in fact a sham.  However, merely because the CSA Consultancy Agreement might be a sham would not take the matter of illegality any further.  The agreement itself is not ex facie illegal and being a sham is not necessarily the equivalent of illegality.  What is more important, however, is that the Plaintiff himself was not a party to the CSA Consultancy Agreement – it was an agreement made between the Defendant and CSA. The Plaintiff does not, and has no need to, rely upon the CSA Consultancy Agreement to make his claims in the present case.  As the Plaintiff has no need to rely upon the CSA Consultancy Agreement to make his present claim, on the well-known authority of Tinsley v Milligan [1994] 1 AC 340, his right to claim is not in any way affected by the illegality or otherwise of the CSA Consultancy Agreement. 

40. Tinsley v Milligan is a House of Lords decision and is widely recognized as the leading case on illegality, and as Mr Bartlett rightly pointed out, it is a case that may be viewed as providing a unifying theory for illegality based on the “reliance principle” – if a claimant does not have to rely on the illegality in order to make his claim, his claim may be entertained.  Although the case has not been universally followed in some common law jurisdictions (notably in Australia where the High Court of Australia has not followed the House of Lords decision in Nelson v Nelson (1995) 184 CLR 538), the majority judgment of Tinsley v Milligan has been followed in Hong Kong by our Court of Appeal in Lau Kwai Kiu v Bian Xintian [2012] 2 HKLRD 954.

41. Insofar as it is alleged that the provisions of the HOA, or the performance thereof, were in contravention of Taiwan law, Mr Kat faces the added difficulty that there is no evidence at all of any Taiwan law, the breach of which may supply the illegality that Mr Kat requires for his new plea of illegality.  Foreign laws are facts and have to be proved by evidence.  Mr Kat, however, prays in aid of the presumption that in the absence of evidence, foreign law is presumed to be the same as Hong Kong law.

Should Taiwan law be presumed the same as Hong Kong law?

42. Although the precise juridical basis of the presumption has been questioned by judges and commentators alike (i.e. on whether the content of foreign law is presumed to be the same as domestic law or that the court is simply applying the law of the forum), it is undeniable that there exists such a presumption.  The court, however, need not apply the presumption in every case: Dicey, Morris & Collins (14^th Ed), at 9-002.

43. Mr Kat relies upon the case of Balmoral Group Ltd v Borealis UK Ltd [2006] 2 CLC 220.  In that case, it was held (at 347E-F) that the presumption may not be applicable where:

(1)  it is not in the interests of justice to apply the same;

(2)  the foreign law is not based on the common law;

(3)  the domestic law alters the common law;

(4)  it is inherently improbable that foreign law is the same; and

(5)  fairness requires it.

44. Mr Kat submits that the present case is an appropriate case to apply the presumption on the criteria set out in Balmoral.  In my judgment, however, it is quite possible that Taiwan, being a civil law jurisdiction, may have tax laws which are quite different from Hong Kong: see Shaker v Al-Bedrawi [2003] Ch 350, at 373C.  I am also quite satisfied that it is inherently improbable that Taiwan tax law is the same as Hong Kong tax law given (i) the jurisprudential difference of the two jurisdictions and (ii) the highly specific nature of taxation law: see Damberg v Damberg (2001) 52 NSWLR 492, where Heydon JA held in the New Zealand Court of Appeal (at §162 ) that “Taxation law cannot be assumed to be a field resting on great and broad principles likely to be part of any given legal system.”

45. It has also been held that in order for the presumption to apply, the domestic legislation concerned must have some degree of universality. In Shaker v Al-Bedrawi[2003] Ch 350, the English Court of Appeal held that certain accounting provisions under the Companies Act were not applicable to a Pennsylvanian company because (i) the Companies Act only applies to companies incorporated under it and (ii) it cannot be expected of the Pennsylvanian company to comply with the accounting provisions under the Companies Act. Peter Gibson LJ thus said, at 372G-H:

“The starting point must be that not every English statute is to be applied to a transaction because a party has either chosen not to prove or failed to prove the law which is otherwise applicable. On the face of it, Part VIII is inapplicable to a company not registered under the Companies Act. Thus the judge was correct to seek to satisfy himself that that Part VIII did not represent some merely domestic rule of English law.”

46. Similar sentiment was also expressed by the Federal Court of Canada in The Ship “Mercury Bell” v Amosin (1986) 27 DLR (4^th) 641, at §10, where the Federal Court said:

“What has appeared constant to me, however, in reading the cases, is the reluctance of the judges to dispose of litigation involving foreign people and foreign law on the basis of provisions of our legislation peculiar to local situations or linked to local conditions or establishing regulatory requirements. Such reluctance recognizes a distinction between substantive provisions of a general character and others of a localized or regulatory character … This English jurisprudential rule that, in the absence of proof of the foreign law governing the case, the judge will apply the law of the forum should not and cannot be seen, it seems to me, as a pure abandonment of the rule of conflict, as if a rule of conflict was so unimportant that its application could be left to the whim of the parties. In fact, it is not a genuine rule of conflict; the situation is in no way comparable to that which exists in the case of renvoi when the foreign law refers back to the law of the forum. It is a rule strictly related to the incidence of evidence. The court does not repudiate the premise that the case is governed by and has to be decided on the basis of the foreign law, but simply says that in so far as it is formally aware the foreign law is similar to its own law. It is … a pure rule of convenience, and one which, it seems to me, can be rationally acceptable only when limited to provisions of the law potentially having some degree of universality.” (emphasis added)

47. In my judgment, tax statutes are not the type of laws that one could rationally assume to have any significant degree of universality.  Tax statutes, being specific laws enacted for the purpose of taxation, are generally not grounded upon universal principles.  They are laws which are likely to vary significantly according to local economic, financial, and societal conditions.  There is no rational basis to assume that the specific tax statutes of one country are the same as another, particularly where the legal systems of the two countries are based upon widely different jurisprudential philosophies (such as that marked the difference between common law and civil law jurisdictions).

48. In my judgment, the presumption that foreign law is the same as Hong Kong law does not apply in the present context where one is concerned with the question whether there is any evidence of Taiwan tax law that have been breached to give rise to the illegality alleged.

49. This being the case, there is presently no evidence at all to support a defence based on illegality arising from breach of Taiwan tax law. 

50. Mr Kat further argues, referring to the period when the Plaintiff was temporarily employed by CMA Hong Kong, that there must have been a breach of Hong Kong tax law during that period of employment as part of the Plaintiff’s salary income was paid to him outside Hong Kong.  In the absence of any evidence of the tax treatment of the Plaintiff’s income during that time I am not sure that that must be the case but in my judgment this is in any event quite irrelevant.  Nothing in this action turns on the temporary employment by CMA Hong Kong and the Plaintiff does not need to rely on that employment, or on Clause 10 of the HOA (or the performance thereof), to make his claim in this action.  By virtue of the reliance principle of Tinsley v Milligan (supra), whatever illegality there was in relation to the Plaintiff’s temporary employment with CMA Hong Kong, it cannot affect the Plaintiff’s right to pursue his claim in the present case.  I therefore reject Mr Kat’s argument in this regard as well.

51. By reason of the matters mentioned above, I am of the view that there is presently no evidence, or no sufficient evidence, to support a prima facie case of illegality.  The factual evidence had already been completed by the time the application was made.  Unless the evidence is to be re-opened and witnesses recalled, the present state of evidence is such that the defence of illegality cannot even get off the ground. 

Prejudice to the Plaintiff

52. I am satisfied that there will be serious prejudice caused to the Plaintiff if the Illegality Amendments are permitted at this stage of the trial. In the context of the allegations made in the Illegality Amendments, the issue of illegality, if allowed to be pleaded now, may raise many issues of facts that have not hitherto been explored in the evidence.  The Plaintiff will have to amend its Reply and Defence to Counterclaim to raise these issues of facts, but it is likely that the following matters, which have not been the subject of close attention (or any attention at all) by the parties when they prepared their evidence for the trial, may become the focus of their evidence:

(1)  the full circumstances surrounding the negotiation and discussions between the Plaintiff and Salem on Clause 5 of the HOA;

(2)  the full circumstances surrounding the negotiation and discussions between the Plaintiff and Salem concerning the $20,000 tax free arrangement;

(3)  the full circumstances surrounding the negotiation and discussions between the Defendant and CSA concerning the CSA Consultancy Agreement;

(4)  the circumstances surrounding the payment by the Defendant directed to the Plaintiff (hence bypassing CSA and the CSA Consultancy Agreement);

(5)  what did the Plaintiff declare to the tax authorities in the various jurisdictions, including in particular Hong Kong and Taiwan?

(6)  what did the Defendant declare to the tax authorities?

(7)  what is the relevant tax and employment law in the relevant jurisdictions?

(8)  by the law of which jurisdiction is the alleged illegality to be assessed?

(9)  if indeed there was illegality, whether the parties were in pari delicto?

53. Plainly, to allow the Plaintiff to address these issues properly without causing injustice to him would mean that he must be given a fair opportunity to amend his own pleadings, file new witness statements, and if necessary seek discovery, administer interrogatories, and seek further and better particulars on the allegations made by the Defendant. Witnesses who have given evidence at the trial may have to be recalled and cross-examined afresh.  There is even the possibility for new witnesses to be called or even subpoenaed (e.g. Mr Asaf who handled the negotiations under Salem’s supervision).  Expert evidence is likely to be required for foreign tax laws relating to the alleged illegality.  The trial, which was about to be concluded, will have to be adjourned with much delay, costs, time and expenses.  This is the kind of consequences that do not sit well with the underlying objectives set out in O.1A r.1 (and I am required by O.1A r.2 to give effect to those underlying objectives in the exercise of my power or discretion in granting leave).

54. The Plaintiff has a legitimate expectation in seeing that the trial, which he has prepared on the basis of the existing pleadings, will be completed expeditiously without delay.  The stress of the Damocles’ sword of an unfinished or impending litigation hanging over one’s head is not measurable in monetary terms – and the stress of a prolonged litigation is no less for a plaintiff as for a defendant.

Exercise of Discretion

55. In the exercise of my discretion, I have taken the following into account:

(1)  The lateness with which this application was brought is extraordinary and essentially after the close of the evidence;

(2)  The absence of any or any satisfactory explanation for the delay in the making of the application.  The allegation of illegality requires no new information that only came to light at the trial;

(3)  The Illegality Amendments sought to introduce a brand new case based on illegality rather than merely to clear up issues already before the court. In fact the original counterclaim of the Defendant alleges a breach of an implied term of the contract now alleges to be illegal and unenforceable;

(4)  The amendment of the counterclaim involves, in effect, the withdrawal by the Defendant of its admission that the HOA was a valid contract between the parties, and that a good and convincing explanation for such a withdrawal has not been provided by the Defendant;

(5)  The HOA is not ex facie illegal, and there is presently no evidence or no sufficient evidence to support even a prima facie case of illegality;

(6)  If the Illegality Amendments are to be allowed at this stage, it is likely that the trial will have to be adjourned, possibly for a lengthy period, with the inevitable consequences of increased costs, time and expenses;

(7)  There will undoubtedly be serious prejudice to the Plaintiff in allowing the amendments which cannot be fully compensated by an award for costs; and

(8)  The fact that the Plaintiff has a legitimate expectation that this litigation, which has been hanging over his head for a long time, would be completed as scheduled and with reasonable expedition.  Even if the Plaintiff’s prejudice is otherwise compensatable by costs, it is not just to impose on the Plaintiff the stress of a possibly prolonged trial and the spectre of a lengthy delay.

56. In the circumstances, I am of the view that the factors that weigh against the exercise of my discretion in the Defendant’s favor are overwhelming and I have accordingly exercised my discretion to disallow the Illegality Amendments.

57. I thank counsel for the comprehensive and helpful submissions and their assistance rendered to the Court.