PAUL Y. MANAGEMENT LTD v. ETERNAL UNITY DEVELOPMENT LTD AND OTHERS

HCA 571/2007

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 571 OF 2007

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BETWEEN

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J U D G M E N T

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1.  Today’s appeal against Master de Souza decision on 8 February 2011 only concerned with the discovery of documents relating to the defendants’ application for approval of a hotel expansion. The defendants alleged that they got approval in principle. These documents and the matter arises in this way.

2.  The plaintiff (“PYM”) sues the 1^st defendant as borrower and the 2^nd defendant and 3^rd defendant as guarantors for a $10 million loan advanced to the 1^st defendant together with interest charges and costs.  The defendants in their defence alleged that PYM only acts as the agent for the 1^st third party (“PYE”).  It also alleged that there was a master agreement between the 1^st defendant and PYE.  There was a further allegation that a hotel expansion agreement was concluded between the defendants and the 2^nd third party (“PYI”). Mr Justice A Cheung (as he then was) ordered that the defendants’ third party proceedings against PYI should be stayed until after the determination of the main action and the third party proceedings against PYE. 

3.  In the defendants’ defence and counterclaim against both third parties, PYE and PYI, the defendants themselves alleged that there was a hotel expansion agreement with PYI.  However in paragraph 41 they also alleged that in May 2006 one Mr Charles Chan acting for and on behalf of PYI and PYE agreed that the 2^nd defendant will be paid a consultant fee of RMB40 million in the hotel expansion agreement and this 40 million payable by PYI maybe set‑off against the aforesaid debt of $10 million and an additional sum of $30 million will be paid to the 2^nd defendant.  The first $10 million was paid by PYM to the 1^st defendant, the second $30 million was paid by PYI to the defendants. 

4.  As Mr Justice A Cheung pointed out, the link between the third party proceedings and these proceedings is this set‑off agreement.  It is the defendants’ case that PYE also agreed to the set‑off agreement.  After the proceedings against PYI third party proceedings have been stayed, the issue becomes what will be the issues in the trial of the main action and the third party’s proceedings against PYE.  To my mind it cannot be just the master agreement because it is the 2^nd defendant’s own case that PYE is a party to the set‑off agreement which comes from the hotel expansion agreement between the defendant and PYI.  That being the case the debt set‑off agreement must be a live issue in the 1^st trial.  This is reinforced by the 2^nd defendant’s witness statement filed for the 1^st trial, where he went at length in respect of the background and the agreement reached in the hotel expansion agreement and what he did pursuant thereto.  He said that he had applied for approval and that was given in principle.  The documents thereunder would be discoverable as documents mentioned in his witness statement and also as documents relevant to an issue to be tried during the 1^st part of the trial. 

5.  However Miss Selina Lau, counsel for the defendants pointed out that if the set‑off agreement as alleged by the defendants with PYI and PYE is a live issue in respect of PYE, then the stay of proceedings against PYI may present a problem.  I am faced with an order that the proceedings against PYI be stayed and I do not have jurisdiction to vary it.  I am afraid that will be a problem for the trial judge and he will have to give direction on how the trial should proceed.  The parties must be sneisble in reaching an agreement or make submissions to the trial judge for the 1^st part of the trial.

6.  For the aforesaid reason, I would dismiss the appeal. 

7.  The 1^st Third Party PYE shall have its costs for the appeal.