BANK OF INDIA v. B. K. REKHATEX (H.K.) LTD AND OTHERS

1985, No.A3017

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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J U D GM E N T

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1. On 3rd July 1992, upon the application of the defendants, Master Cannon dismissed the plaintiff's action for want of prosecution. The plaintiff now appeals against that decision.

2. The 2nd 3rd, 4th and 5th defendants were guarantors of the 1st defendant to which, in consideration of those guarantees, the plaintiff extended the usual facilities required by an import/export company. From time to time the 1st defendant opened Letters of Credit for its own customers. On 6th December, 1984 the 1st defendant applied to the plaintiff for a documentary credit for US$480,000 to enable its customer, Pureton Limited, to purchase goods from Japan. On 7th December the plaintiff issued an irrevocable Letter of Credit in favour of the Japanese supplier, the confirming bank being its branch in Tokyo.On the same day the 1st defendant deposited with the plaintiff HK$500,000 which it had received from Pureton as security for the credit. On 26th December the plaintiff's Tokyo branch received documents and, on the same day, negotiated the draft drawn on the plaintiff in Hong Kong by making payment to the Japanese supplier's banker.

3. On 27th December the plaintiff received from Tokyo a request for reimbursement together with the documentation. The following day the plaintiff gave the lst defendant two days in which to submit written abjection to the documents. The 1st defendant was given a photocopy of the Bill of Lading. On 29th December the 1st defendant received part payment of US$120,000 from Pureton which it forwarded to the plaintiff to hold "on (the 1st defendant's) account until ... further instructions". On the same day it was also discovered that the Bill of Lading and certain other documents were forgeries. Between 31st December and 4th January 1985 the 1st defendant informed the plaintiff both of discrepancies on the face of the documents and of the forgeries and said that it was not prepared to accept the documents.

4. By writ issued on 11th May 1985 to which the Statement of Claim was attached the plaintiff sought, inter alia, US$480,600 being the amount of the Letter of Credit including confirming charges and interest thereon. The Letter of Credit is the only live issue remaining between the parties. By Defence dated 23rd December 1985 the defendants pleaded first, that the plaintiff knew or ought to have known that the 1st defendant was acting only as agent for Pureton; and second, by reason of the discrepancies and forgery the plaintiff ought to have been put on enquiry and to have rejected the documents. By counterclaim the 1st defendant sought a declaration that it is not obliged to pay the plaintiff in respect of the Letter of Credit, and return of the two sums which it. had paid the plaintiff.

5. The writ having been issued on 11th May 1985, service was accepted on 21st May by the defendants' then solicitors who asked for an extension of time to file acknowledgment of service. That request was refused. Between May and October 1985 the plaintiff was dealing with matters in allied proceedings involving Pureton. On 29th October the plaintiff gave the defendants' solicitors final notice for filing acknowledgement of service. No acknowledgment having been filed, the plaintiff's solicitors_.obtained approval of a draft judgment on 20^th 23rd November acknowledgment of service was filed. Finally, after some discussion, a defence and counterclaim was filed on 23rd December.

6. Five months inactivity followed until 23rd May 1986 when the defendants' solicitors advised that they would amend the defence and counterclaim and that the filing of a reply and defence to counterclaim could be deferred. On 4th August the plaintiff's solicitors reminded the defendants' solicitors of the need to file the amended defence and counterclaim. Thereafter, nothing happened until 14th January 1988 when the plaintiff's solicitors filed notice of intention to proceed and reminded the defendants' solicitors again of the need for the amended defence and counterclaim. No such amended pleading was forthcoming and, on 9th May 1988, a reply and defence to counterclaim was filed. On 30th May a summons for directions was issued and the usual directions were given by a Master on 21st June, the application to set down being adjourned.

7. There was thus a period of three years between the issue of the writ and the summons for directions. Mr. Chan, who appeared for the plaintiff, conceded that there has been inordinate and inexcusable delay on the part of the plaintiff in these proceedings. He contended, however, that responsibility for the delay during this period lies with the defendants because of the period of about six months taken to file the defence and counterclaim and because, for two years between May 1986 and May 1988, the proceedings were held up at the request of the defendants by virtue of their notification that they would amend their pleading.

8. Plainly, the defendants bear a share of responsibility for delay during this whole period. I reject, however, the suggestion that. the plaintiff is not to blame. Plainly, the plaintiff could and should have got on with the action after no amended pleading was forthcoming within a reasonable period of, say, three months. In my view the plaintiff shares at least an equal measure of responsibility for the delay.

9. The directions given by the Master on 21st Juice 1988 required lists of documents within 14 days. The plaintiff's list was' ultimately filed on 21st December, the 1st defendant's list on 4th January 1989 and the list of the other defendants on 25th January. Although the 2nd to 5th defendants' list was filed a month after that of the plaintiff, responsibility for delay during this period seems to me to be evenly divided.

10. Between January 1989 and February 1992 very little happened. The plaintiff obtained counsel's advice and spent time looking for a banking expert. A summons in relation to expert evidence was heard on 4th December 1990. On 13th September 1991, after some delay on the part of the defendants, the plaintiff inspected the defendants' documents. As a result, lists of documents were amended by consent on 1st February 1992. As I understand it, the amendment revolved around one document only. Responsibility for the delay during this period attaching plainly to the plaintiff, it was  contended that because the defendants had taken no objection to any delay, raised no question of any prejudice and taken a step in the proceedings by consenting to filing of the amended lists, they waived any delay before 1st February 1992. In particular, the consent indicated that the defendants agreed to the action being proceeded with notwithstanding any earlier delay.

11. Thereafter, the plaintiff took steps to prosecute the action by filing its amended list and by making application for the action to be heard together with allied proceedings. On 14th April the defendants took out a summons to dismiss the action.

12. Mr. Chan's argument was that under Order 2 rule 2(1), a party who takes any fresh step in the proceedings effectively waives any existing irregularity arising from failure to comply with the rules. By parity' of reasoning, he said that delay, although not amounting to a particular irregularity under the rules, is nonetheless an irregularity which can be waived by the other party taking a step. For this proposition he relied upon Austin Securities Limited v. Northgate and English Stores Limited (1969] 1 WLR 529. The facts of that case are somewhat complex but in essence there had been a delay of two years occasioned by the illness and eventual death of the plaintiff's solicitor. In his judgment at p.532 Lord Denning M.R. said_:

" Soon after his death, the plaintiffs instructed other solicitors. They acted promptly. On April 3, 1968, they gave notice of intention to proceed. It was a month's notice. That month is given by the rules so as to enable the defendants to consider their position, and to apply, if so advised, to dismiss the action for want of prosecution. The defendants did not apply within the month. So the plaintiffs on May 9, 1968, delivered a statement of claim. The defendants' then solicitors accepted it. But then on May 21, 1968, the defendants went to new solicitors. These new solicitors asked for their time for defence to be extended. This was granted. But then on May 27, 1968, the new solicitors said that they intended to apply under section 307 of the Companies Act, 1948, for the action to be stayed. (This is a section which, with section 226, enables the court to stay actions against a company in winding up. It has nothing to do with dismissal for want of prosecution.) It was not until July 18, 1968, that they did so apply under section 307, and in their summons they added, almost by an after thought, an application to stay for want of prosecution....

    The judge was not referred to the law about the duties of liquidator as we have been: and I think it makes all the difference to the case. It shows that the defendants were just as guilty of delay as the plaintiffs. There wasdelay on both sides for the two whole years from March, 1966, to April 1968. This delay was inordinate. It can be explained but not excused. So far as the plaintiffs are concerned, it is explained by the illness of their solicitor, but I fear not excused. So far as the defendants are concerned, it is explained by the forgetfulness of the duties of liquidators but again not excused. It is one of those cases, therefore, where the defendants have themselves largely contributed to the delay: and the courts will not look kindly on their application to strike out....

    Then there is evidence of waiver. On April 3, 1968, the plaintiffs gave notice of intention to proceed - and did proceed. Yet it was not till July 18, 1968, that the defendants (by new solicitors) took any point about want of prosecution."

13. I do not think that passage helps Mr. Chan The Master of the Rolls dealt somewhat summarily with the question of waiver. He dealt with it in terms of the defendants' failure to make application to strike out following service of notice of intention to proceed. The steps of accepting a statement of claim and asking for time for defence to be extended do not seem to have received any particular attention. I agree therefore with Mr. Scott, who appeared for the defendants, that a step in the proceedings per se does not amount to waiver. The step must be looked at in the context of what has taken place. I have no hesitation in saying that, against the background which I have set out, the defendants' consent to an amended list of documents does not on its own or with the other considerations mentioned by Mr. Chan constitute waiver.

14. The real issue between the parties, as I see it, is whether it has been shown that the delay will give rise to a substantial risk that it is not possible to have a fair trial of the issues in. the action or is such as is likely to causelor have caused serious prejudice to the defendants. That, of course, is the second hurdle which a defendant has to overcome in a striking out application for want of prosecution according to Birkett v. James [1978] A.C. 297. Assuming that the hurdle is surmounted, the third consideration for a Court is whether it should exercise its discretion in favour of a defendant. For reasons which will be come apparent, it is not necessary for me to undertake that third consideration.

15. The first complaint is that the business and reputation of the 1st defendant has been damaged and the delay in prosecution of the action has perpetuated and increased that damage. The 2nd defendant, as managing director of the 1st defendant, has deposed that the 1st defendant, in common with other import/export businesses whose trading is financed almost entirely from credit facilities provided by banks, must maintain a good relationship and reputation with the bankers which it uses and the banking community generally. In 1985/86 the 1st defendant lost the support of the plaintiff and another bank because, so the 2nd defendant believes, of the litigation. Only since 1988 has the 1st defendant obtained what the 2nd defendant regards as adequate facilities. The continuing litigation, however, has prevented the lst defendant from obtaining sufficient facilities to maximize the expansion of its business so that the business is not as profitable as might reasonably have been expected. The 2nd defendant further deposed that facilities have been rejected by various banks because, he believes, of the existence of the continuing litigation. He said that that is the only reasonable explanation because he believes it to be common knowledge that banks in Hong Kong keep litigation involving their customers and potential customers under close scrutiny.

16. I reject this contention for two reasons. First, amongst the banking correspondence exhibited by the 1st defendant, there is correspondence with the Hong Kong Bank. In February 1987 an application for facilities was rejected by that bank which, however, indicated it would re-consider the proposal when audited accounts for March 1987 were available. In October 1991 there were further discussions which were undertaken at the invitation of the bank rather than the 1st defendant. In my view that quite plainly indicates that the Hong Kong Bank at least was not closely following the litigation involving the 1st defendant but rather focusing upon the 1st defendant's financial standing. Apart from the 2nd defendant's belief, there is nothing to substantiate his suggestion that the banks were wary of the 1st defendant because of the litigation.

17. Second, the figures supplied by the 2nd defendant wholly undermine his contention. After making appropriate adjustments, the 2nd defendant deposed to the real level of facilities available to the 1st defendant to have been as follows

1984/1985                              HK$2,020,846

1985/1986                              3,836,700

1986/1987                              12,800,810

1987/1988                              16,381,800

1988/1989                              14,892,550

1989/1990                              14,536,000

1990/1991                              14,600,000

18. It is not in dispute that, if this action had been prosecuted with diligence, trial would probably have taken place in 1987. The figures show that in 1987 there was a very sharp increase in the level of facilities obtained by the lst defendant. That level has been maintained. It is difficult to see how, in the light of these figures, it can be said that the 1st defendant has been injured by the pending litigation. For the 2nd defendant to say, as he does, that the lst defendant would have been able to increase the level well beyond the figures obtained and to increase the scale and profitability of its business is wholly speculative.

19. The 2nd and 3rd defendants, the 3rd defendant being the wife of the 2nd defendant; complained that they have faced the risk of having to sell their home to meet any judgment awarded against them and move into rented accommodation, a risk which has been prolonged unnecessarily. Mr. Chan suggested that the delay has in fact benefited the defendants because of the rise in the property market. That may be so, but the defendants would still have to rent accommodation the cost of which has risen commensurately. I remain unpersuaded, however, that there is any real substance in this complaint.

20. The 2nd defendant further complains that the protracted litigation has damaged his health and affected his personal reputation within the business community in Hong Kong. He deposed to having unduly high blood pressure in 1985 brought on by the litigation. A medical certificate dated 29th April 1992 was exhibited in support. The certificate says that in about October 1985, the 2nd defendant had a syncopal attack, had been hypertensive before and had been on medication for his blood pressure. The doctor's impression at the time was that the attack was due to stress. Stress can, of course, arise for many reasons. There is_.nothing which persuades me that the 2nd defendant's medical problems might have . been caused by the litigation which, in any event, was in its very early stages at the time.

21. As to his reputation, the 2nd defendant said that in the first few years after the commencement of this action his reputation in the business community suffered because of the outstanding litigation. He was unable to particularize this beyond saying that he had been made aware by friends that people had on occasions talked about the relatively large size of the claim and the possibility of the lst defendant going into liquidation as a result of the litigation. What the 2nd defendant said is hardly compelling. But the complaint must primarily, I think, be looked at in the light of the increased facilities which the lot defendant obtained from 1986/87 onwards. In the light of the 1st defendant's substantial increase in business, it is difficult to see how the 2nd defendant can consequentially complain that his reputation has suffered. I fear that again there is nothing in this point.

22. In relation to the prospect of having a fair trial, the defendants complain that witnesses cannot be traced and that the defendants and other witnesses will have difficulty in giving accurate testimony of the events not less than eight years afterwards. As far as the witnesses themselves are concerned, it is, I think, not now indispute that the witnesses have been traced and are or will be available for trial.

23. At trial, two matters will be in issue. First, the question of whether the 1st defendant was agent of Pureton. I do not think that there is any real dispute that the lst defendant did accommodate customers by opening LCs The real dispute, in my judgment, will revolve around the application for the LC which is the subject of this action, an application which was on its face made by the lst defendant in a personal capacity with no suggestion of agency. It seems to me unlikely that the memories of witnesses will play a significant part in the resolution of this issue.

24. The other issue is whether, on the face of the documents, the plaintiff's Tokyo branch should have negotiated the draft and whether the plaintiff should reimburse the Tokyo branch in the light of the discrepancies and forgeries brought to its attention. The discrepancies and forgeries turn entirely upon the documents available. There is no dispute that they were brought to the attention of the plaintiff having been recorded in correspondence passing between them. Nor is there now any dispute that these were brought to the plaintiff's attention before reimbursement of Tokyo (if any reimbursement took place at all) occurred. Whether the documents were discrepant and whether the Tokyo branch should have negotiated the draft on the basis of those documents is a matter to be determined upon the documents themselves and as a matter of law. Whether the plaintiff as issuing bank was required to reimburse its Tokyo branch and was entitled to seek reimbursement from the 1st defendant again turns.upon the documents, correspondence and upon a matter of  law.

25. Although I am conscious, as Mr. Scott reminded me, that I must not prejudge any issues, it is necessary in dealing with an application of this nature for a judge to form a view as to the likely course that the trial will take. I am in no doubt that at trial very little will depend upon oral evidence or upon witnesses having to dredge through their memories as to what was said or done at least eight years ago.

26. In all the circumstances, I am not persuaded that there is a substantial risk that it will not be possible to have a fair trial, nor that the defendants have been caused or are likely to be caused serious prejudice. The appeal must therefore be allowed.

27. Had it been necessary for me to go on to consider the exercise of my discretion, I would have dealt with two points. First, whether the defendants could be blamed for the delay or had consented to the delay. I have already indicated that the defendants did not consent to or waive the delay. I have also indicated that overall the defendants are to be blamed only for a very small portion ^of the delay i.e. the delay in filing their defence and counterclaim and a period of perhaps three months during which they failed to produce an amended pleading. Neither of these matters would have persuaded me to exercise my discretion in favour of the plaintiff.

28. Second, Mr. Chan argued that the defendants themselves failed diligently to prosecute their counterclaim. For this proposition he relied upon Zimmer Orthopaedic Ltd. v. Zimmer Manufacturing Co. Ltd. [1968] 1 WLR 1349. The Court of Appeal held that a defendant making a counterclaim is in the same position as the plaintiff in the action and that, as the defendants had an active claim by way of counterclaim which they could at any moment have prosecuted had they chosen to do so, they could not complain of the plaintiff's delay. Since both parties were guilty of corresponding faults, the Court ordered that both claim and counterclaim be dismissed for want of prosecution. At p.1353 Harman L.J. said

" What is said by Mr. Gratwick is that, although the plaintiff has got a duty to carry on the action and to bring it to trial, there is no such duty resting upon the defendant, and he cites the recent case of Allen v. Sir Alfred McAlpine & Sons Ltd. [1968] 2 W.L.R. 366; (1968] 1 All E.R. 543, C.A. in support of that assertion. In other words, a defendant is under no duty to stir up what my brother Salmon L.J. calls the sleeping dog and he is entitled to let it lie. The plaintiff cannot; but that is in the case where there is no counterclaim. It seems to me that it makes all the difference and the court, where there is a counterclaim, is in a position to make terms, as it is entitled to make them, and to say: "I shall only dismiss the claim for want of prosecution if I also dismiss the counterclaim for want of prosecution" - because after all the defendant was in a position throughout this period, if he chose, to bring the action on: he cannot now complain, as he does, of the delay because he had himself an active claim which, if he chose, he could at any moment have prosecuted, and therefore it does not lie in his mouth, as it seems to me, to ask that the matter should now be dealt with as if the two actions were wholly independent. They are not: they are action and counterclaim."

29. The Lord Justice went on to dismiss the plaintiff's claim and the defendants' counterclaim for want of prosecution. At p.1354 Salmon L.J. said :

"This case, as my Lord says, is entirely different from the Allen v. Sir Alfred McAlpine & Sons Ltd [1968]. 2 W.L.R. 366 class of case,. If I may say so without any disrespect; the plaintiffs and the defendants are like two dogs fighting over a bone. The bone is the exclusive right to use the name "Zimmer" in connection with orthopaedic goods, which they each sell in England. Before the fight had really got under way, both the dogs went to sleep for a period of about five years. The defendants woke up first, about five days before the plaintiffs, and complained of the plaintiffs' long slumber and said "This gives us, the defendants, the right to have the bone." The judge came to the conclusion that the plaintiffs were in reality no more to blame than the defendants for the delay which had occurred, and said in effect: "Either the fight goes on or you both stop fighting and share the bone between you." I entirely agree with the judge's view."

30. Mr. Scott attempted to distinguish the present case. I must confess that I had some difficulty in understanding his argument. It was, I think, in essence that the defendants do not need actively to pursue their counterclaim because, if the plaintiff fails, then the sums which the defendants claim will revert to them automatically. I doubt the correctness of that in law and fact. It seems unlikely that the plaintiff will disgorge the payments without action on the part of the defendants. In any event, the parties are essentially "fighting over a bone". Both want the substantial payments which were lodged with the plaintiff although the plaintiff, of course, also seeks the balance of the value of the Letter of Credit and interest thereon. Who gets this bone depends upon resolution of identical issues.

31. In my view, had it been necessary to express it, I would have held that the defendants were equally at fault, in not pursuing their counterclaim. I would have dismissed both the claim and counterclaim.

32. I allow the appeal. The Order of Master Cannon is set aside and the defendants' summons dated 14th April 1992 is dismissed. I make orders nisi that the costs of the appeal and the costs below be to the plaintiff in any event: and that there be no order on the plaintiff's summons dated 9th September 1992 fo the counterclaim to be dismissed for want of prosecution should the appeal fail. The plaintiff's summons dated 18th February 1992 for this action to be. tried at the same time as Action 5467 of 1990 is adjourned sine die with liberty to restore.