DR. PETE FASHIONS COMPANY LIMITED v. C & C TEXTILES CORPORATION

IN THE COURT OF APPEAL

1996, No. 188

(Civil)

______________

(BY COUNTERCLAIM)

______________

______________

J U D G M E N T

______________

Ching, J.A. (giving the judgment of the Court) :

1. As originally constituted this action involved only two parties. The Plaintiff was Dr. Pete Fashions Company, Ltd., which is a company incorporated in Hong Kong. It has an issued and fully paid up capital of two shares of $1,000 each. One is registered in the name of Chiu Kin Hong and the other is registered in the name of his wife. They are its only two directors and Chiu is in de facto control. The Defendant was C. & C. Textile Corporation, a Taiwanese corporation. It was a supplier of Dr. Pete. The claim was based upon allegations that some of the deliveries made by C. & C. were short while others were of goods of inferior quality. It was alleged that C. & C. had promised to make good the losses suffered by Dr. Pete but had failed to do so. In the course of their dealings Dr. Pete had furnished to C. & C. seven post-dated cheques signed on its behalf by Chiu. For one reason or another payment was not made on presentation. C. & C. therefore served on Dr. Pete a statutory notice and was threatening to present a winding-up petition. Dr. Pete obtained an injunction restraining it from doing so.

2. C. & C. instituted its own action, High Court Action No. A5162 of 1995. Chiu was the only Defendant. Quite mistakenly C. & C. alleged that it had sold goods to Chiu who had paid by way of nine post-dated cheques on none of which payment was made. We were told that Chiu applied for legal aid in October 1995 but that this was refused in October 1996. Chiu also applied for security for costs and this was ordered in the sum of $450,000 for the entire proceedings. There has been no appeal against that order. When C. & C. realised its mistake in alleging sales to Chiu it applied for and was given leave to amend its claim to add Dr. Pete as a Defendant and to allege that it had sold to Dr. Pete and that payment had been guaranteed by Chiu who gave his personal cheques to C. & C. It failed, however, to effect the amendments within the time limited. On 13th February, 1996, Deputy Judge Yuen refused to extend that time because she acceded to an application by C. & C. that the action should be permanently stayed while the claim was to be brought by way of counterclaim in this action. At the same time she ordered that the security for costs put up by C. & C. in that action should stand as security for Chiu's costs in this. She commented that if Dr. Pete wished to have security for its costs it could make a separate application. Whether or not they should do so and what success they might have had are different matters.

3. The counterclaim against Dr. Pete is based upon failure to pay for goods sold and delivered, an account stated by a document signed by Chiu on its behalf and the dishonour of the seven post-dated cheques already mentioned. So far as the last is concerned there is an alternative allegation that Dr. Pete agreed to replace those cheques with letters of credit but failed to do so. The defence of Dr. Pete is that all goods delivered were fully paid for. It makes no admission that the document relied upon as being an account stated is in fact an account stated. It alleges that the seven post-dated cheques were extracted by threats made by C. & C. that unless they were given C. & C. would withhold delivery of all goods under ongoing contracts. It is said that in these circumstances the cheques were given to C. & C. only so that it could show them to its own suppliers to assure them of its creditworthiness. It is said that they were given on the basis that they would never be presented for payment.

4. The counterclaim against Chiu is that he was the guarantor of Dr. Pete and hence gave the nine post-dated cheques which are also sued upon. His defence is precisely the same as that of Dr. Pete. It is said that the causes of action against Dr. Pete and Chiu are different. So Dr. Pete is being sued on its seven post-dated cheques while Chiu is being sued on his own nine post-dated cheques. While it is true that the cause of action on each of the two batches of cheques relate to the two parties it remains that the claim is that they were given in payment for or in guarantee for the payment of the goods. Equally, it is true that on the face of it Chiu has an additional defence in that he denies that he ever gave any guarantee. The difference is more apparent than real. The claim is that Chiu's cheques replaced those of Dr. Pete. The defence, common to both, is to put it shortly total failure of consideration. If Dr. Pete should be found not liable then any question of a guarantee by Chiu will be irrelevant. If the cheques of Dr. Pete are found to have been given for no consideration it follows, on C. & C.'s case, that so were Chiu's. The issues relating to each of them are exactly the same.

5. Dr. Pete made an application for security for costs. At that time it was represented by the same legal representatives as Chiu. It was argued before us that this was mere happenstance because they had been acting for Dr. Pete in this action and for Chiu in action No. A 5162 before the proceedings were ordered to be heard together. However that may be, they were acting for both and continued to do so. It appears that in the course of the hearing before the Master he questioned why security for Dr. Pete was necessary in all of the circumstances. The application went part heard and when it was resumed Chiu was separately represented. This was after he had applied for legal aid in action No. 5162 and before it had been refused. Despite questions being asked, no explanation was ever given as to how he was able to find the funds for private representation. The Master asked why there was now separate representation the answer he received was that Chiu had always intended to be separately represented and had in fact applied for legal aid. Having regard to all of the circumstances it can be of no surprise that the Master dismissed the application.

6. Dr. Pete appealed that dismissal to the Judge in Chambers, Jerome Chan, J., who dismissed the appeal. The instructions to apply to the Master and to appeal his dismissal must, of course, have been given by Chiu. In the course of his judgment the Judge said,

"In the absence of any credible explanation for the sudden change of legal representation by Chiu, one can hardly query C. & C.'s suspicion that it was a deliberate attempt to make it possible for Dr. Pete to continue to pursue its claim for security for full costs notwithstanding the common defence and in view of the master's observations. It would be reasonable to infer mala fide on the part of Dr. Pete and its master, Chiu. I found the alleged explanation offered by Dr. Pete plausible in the circumstances. In the absence of any believable excuse, I would have to draw the adverse inference against Dr. Pete and Chiu that it was a deliberate mala fide course of action."

Clearly, the Judge meant 'implausible.' He was reinforced in his view because counsel for Chiu had remained conspicuously silent when the Master asked his questions, because an argument as to a potential conflict of interest between Dr. Pete and Chiu was unreal and because he took the view that on the available evidence C. & C. had a high probability of success.

7. Before us, Mr. Mumford, Q.C., who appeared for Dr. Pete, complained of the finding of mala fides. He has read the judgment to mean that mala fides was found not only as against Dr. Pete and Chiu but as against their legal representatives as well. With respect, that is not what the judgment says. While it is true that whatever Dr. Pete and Chiu did was done through legal representatives no doubt the latter were acting upon instructions. It may be that they were mistaken in having done so but that is not to say that they were necessarily also acting mala fide. Mr. Mumford argues also that there should have been no such finding against Dr. Pete and Chiu. We do not see how the Judge could have come to any other conclusion. We would mention that the Judge said,

"In any event Dr. Pete declined to apply for any adjournment for evidence to be placed before me to refute the suggestion of mala fide that was made as early as May 1996."

As we understand the position it is accepted that this is accurate. It is said that the offer of an adjournment was declined because there were no further facts to be put before the Court and the view was taken that the facts already before the Court would not justify a finding of mala fides. That view was wrong.

8. So far as the potential conflict of interest was concerned it was argued that if the same solicitors acted for both parties it would not be possible for Chiu to issue third party proceedings against Dr. Pete. How this could ever arise is in no way apparent. If Dr. Pete has the money and is found liable, it and not Chiu will have to pay. If Dr. Pete does not have the money and both are found liable then Chiu will pay but ex hypothesi any third party proceedings by him would be useless. The supposed difficulty ignores the fact that Chiu and his wife are the only shareholders and directors of Dr. Pete and that he is in control of the company. Then it was argued that Dr. Pete might be wound up and that creditors might complain that the solicitors had not properly advised it upon its rights against their other client, Chiu. What rights Dr. Pete might have against Chiu were never identified. Nor, if it ever came to that, was it ever explained how it would assist to advise Chiu as the person in control of Dr. Pete that he should cause himself to be sued. Indeed, at one stage before the Judge counsel for Dr. Pete suggested that it had sufficient funds to pay C. & C.'s claim if they obtained judgment although it is fair to say that once the ramifications of that suggestion were pointed out it was withdrawn. We can see no conflict between Dr. Pete and Chiu.

9. We see no justification in the complaint that the Judge should not have come to a view on the chances of success of C. & C. The Court is entitled to consider those chances especially if, as appears here, an order for security might stifle the counterclaim. When the matter was before the Judge one thing that struck him forcefully was a debit note issued by Dr. Pete. It was relied upon by Dr. Pete and was alleged to have been a debit note issued to C. & C. in relation to short deliveries under three contracts. It was dated 10th April, 1994, but the contracts to which it related did not come into existence in August of the same year. We allowed de bene esse an affirmation of the person who was responsible for that debit note. She explains that the date was mistakenly put in for 1st September, 1994, and that upon the mistake being realised a further, correctly dated, copy was sent. We do not consider that this makes any meaningful difference. While we wish to say as little as we can on the question of the merits we must say that on the evidence before us it appears that C. & C. has a very strong case.

10. The main plank of Mr. Mumford's argument was that Dr. Pete and Chiu are two separate legal entities which are entitled to be separately represented. Nobody doubts that but it is not the question. The question before the Master and the Judge was whether or not C. & C. should be made to put up security for a further set of costs. The Judge found that it should not. It was urged upon us that because Chiu has now been given legal aid he could not in any event be represented by those appearing for Dr. Pete. We know of no reason why that should be so. In all of the circumstances it has not been shown that the Judge has fallen into any error, far less any error which would permit us to interfere. Even if it had been shown we would have had to go on to exercise our own discretion and we would have had no hesitation in refusing to order any security for the costs of Dr. Pete. This appeal, indeed the application to the Master and the appeal to the Judge, should never have been brought.

11. We dismiss this appeal. We make an order nisi that the costs of this appeal should be paid to C. & C. by Dr. Pete and, for the avoidance of doubt, that those costs should be taxed if not agreed and payable forthwith.