XCHRX JOSEPH ENTERPRISES, INCORPORATED v. ALLTRONICS TECHNOLOGY CO. LTD. and Others

1990 No.A5511

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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J U D G M E N T

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1. There are two applications before me. Both are made by the Defendants.

2. The first is an application, pursuant to RSC Order 18 rule 19 (1) (a), that paragraphs 14, 15 and 16 of the Statement of Claim herein be struck out because they disclose no reasonable cause of action.

3. On such application the Defendants also rely on the Court's inherent jurisdiction and say that such paragraphs constitute an abuse of the process of the Court.

4. The second application is an appeal from the Order of Master Cannon made the 9th day of July 1992 when she ordered that the Defendants make specific discovery and dismissed their request that the Plaintiff be ordered to provide further particulars.

5. Mr Erving, for the Defendants, opted to proceed with the strike out first it being his belief that were he successful with such then the appeal - which - as far as the particulars were concerned - deals primarily with the Defendants' request for particulars of the impugned paragraphs - would be otiose or nearly so. His suggestion was that if his strike out application were successful then his appeal might be adjourned sine die.

6. The dispute between the parties centres on a contract dated the 31st day of January 1986, ("the 1st contract"), which provided for the manufacture and sale by the 1st Defendant - of which the 2nd and 3rd Defendants are directors - to the Plaintiff of electronic switches known as "Clappers".

7. The 1st contract was followed by another contract on the 12th day of February 1987, ("the 2nd contract"), and by a further one in mid January 1988, ("the 3rd contract").

(The Plaintiff refers to the 2nd and 3rd contracts as renewals (Statement of Claim, para 4). The Defendants deny this and suggest that they are separate agreements (Defence paras 30/31) but nothing appears to turn on this as far as the strike out application is concerned.)

8. The Statement of Claim contains a number of allegations but the one relevant to this application is the allegation that the Defendants misrepresented the cost of production of the Clapper by basing such on a mould which was less economic than the one actually used and also by misrepresenting the cost of various other components.

9. These allegations are set out in the impugned paragraphs as follows -

"14. Further, on various days in 1986, 1987 and 1988 in pre-contract price negotiations between the Plaintiff and the First Defendant, the First Defendant wrongfully misrepresented the cost of production of the Clapper to be arrived at using the Plaintiff's mould for the said plastic casing, when in fact for one or more of the said years' production the new infringing mould which facilitated more economic production was to be used.

15. During the said negotiations, the First Defendant wrongfully misrepresented the cost of various other components of the Clapper.

16. In reliance upon the said misrepresentations, the Plaintiff entered into contracts with the First Defendant for production of large quantities of the Clapper at an inflated price."

10. For a clear understanding of paragraph 14 it should be read in conjunction with paragraph 10.

11. Such reads -

"10. Further, in 1986 the Plaintiff supplied a single reverse-cavity mould for production of the plastic casing, and original materials for the printing of the packaging of the Clapper, all design and copyright in which items were also the property of and vested in the Plaintiff."

12. Reading paragraphs 10 and 14 together it is clear that the Plaintiff alleges that there were two moulds for the production of the plastic casing - the one supplied by the Plaintiff in 1986 and the allegedly infringing one. The Defendants accept this. Mr Erving says that he interprets paragraph 14 as meaning that the Defendants had two moulds and therefore could have made the Clapper at a lower cost than they said they could.

13. The germane part of the 1st contract - which was drafted by the Plaintiff's then solicitors - specifies a price for the Clapper as follows -

"1. The manufacturer agrees to produce and the buyer agrees to buy from the manufacturer subject to Clauses 11 and 21 hereof five hundred thousand (500,000) units of THE CLAPPER at the following costs and prices:

(A) Unit cost of THE CLAPPER is agreed to be US$3.17, FOB Hong Kong. If the buyer elects for the manufacturer to produce a Clapper which includes a light unit, the buyer will give the manufacturer written notice of such election and as to the numbers of Clappers with a light unit elected to be produced within 60 days after the receipt of notification of safety approval from Underwriters Laboratory (UL) and Canadian Standard Association (CSA). The unit cost of the Clapper with light is agreed to be US$3.24 FOB Hong Kong. The buyer also agrees to pay for all modifications which may be necessary to the moulds in producing THE CLAPPER with a light unit.

(B) Cost does not include packaging.

(C) Proofs of packaging printing must be approved by the buyer prior to the start of the packaging printing run.

(D) The total unit cost of THE CLAPPER with packaging will vary according to the packaging requirements. A complete list of components and a list of packaging prices and a list of individual packaging requirements is included in Addendum 1 of this contract."

14. Mr Erving says that this contract sets out two prices but does not refer to the manner of their calculation. Put simply, they were arrived at - in some manner - prior to the contract and then inserted into it.

15. Pausing here, may I say that I have little difficulty in understanding the 1st contract and paragraphs 10, 14, 15 and 16 to mean -

(1) There were two moulds, one of which - the allegedly infringing one - was more economic in production.

(2) It was the latter which was actually used in production.

(3) Prior to the signing of the contract the 1st Defendant represented to the Plaintiff a cost of production which was based on the use of the less economic mould.

(4) The 1st Defendant also misrepresented the cost of other components.

(5) In reliance on these representations the Plaintiff entered into the contracts at specified prices which were higher than they would otherwise have been but for the alleged misrepresentations.

16. The Plaintiff provided Particulars of its Statement of Claim on four occasions - on the 14th of January 1991, ("the First Particulars"), the 14th of May 1991, ("the Voluntary Particulars"), the 2nd of April 1992, ("the Third Particulars") and on the 23rd of April 1992, ("the Fourth Particulars").

17. The relevant sections of the First Particulars are -

"Under paragraph 14

(1) Of the allegation that the 1st Defendant "on various days in 1986 and 1987 and in pre-contract price negotiations between the Plaintiff and the 1st Defendant, the First Defendant wrongfully misrepresented the cost of production of the Clapper ...." :-

(a) Stating the contents of each of (the) misrepresentations that were allegedly made by the 1st Defendant;

Reply

That the cost figures put forward by ATC to JEI for the Components of the Clapper upon which ATC was to base its percentage assembly/labour charge, percentage overheads charge, and profit percentage thereupon, and therefore the total price to be paid by JEI to ATC for each Clapper was as set out in the communications by ATC to JEI particularised below.

(b) Stating the exact date when each of the misrepresentations was made;

(c) Stating whether the alleged misrepresentations referred was (sic) made orally or was contained in writing on each of the occasions referred to;

(d) If contained in writing, identifying the same;

(e) If the alleged misrepresentation was made orally stating by whom of the 1st Defendant was the misrepresentation made and to whom of the Plaintiff were misrepresentations made;

Reply

Date	Oral(O)/ Written(W)	(ATC) Author	Addressee (JEI)	Reference
30.11.85	O	DL	JP	D*
05.12.85	W	DL	H.P. Hirsch	D*
27.01.86	W	ATC	Materials List	LNB-4 pp 31,32
15.10.86	W	ATC	Materials List	LNB-4 pp 33,34,35
12.02.87	O	DL	JP	D*
18.02.87	W	DL/Paul Ng	JEI	LNB-8
16.11.87	W	ATC	Materials List	LNB-9 pp 2,3,4,5
17.11.87	W	DL	JP	LNB-9 p1
26.11.87	W	DL	JP	LNB-9 p6
02.12.87	W	DL	JEI	LNB-10 p 2-3
06.11.88	W	DL	JP	LNB-10 p7
11.11.88	W	DL	JP	LNB-13 pp 8,9 (11 & 12)

and other oral conversations between DL and JP between these dates of which oral evidence will be given at trial herein.

D* = Discovery of document or JP's note of oral representation to be made following Directions herein.

(f) Stating whether it is the Plaintiff's case that the "misrepresentation" referred to contained (a) statement of facts which the Plaintiff alleges to be untrue;

Reply

Yes.

(g) If the answer to (f) if in the positive, stating how those statements of facts were untrue.

Reply

In each case, that the cost of components quoted to JEI and to be paid by ATC was the lowest ATC could achieve and/or was the minimum price ATC would pay during the currency of the production contracted for. Such costs to ATC were and were known to ATC to be or to be likely to be lower than those quoted to JEI. Full particulars will follow discovery by ATC.

(2) Of the allegation that "the new infringing mould which facilitated more economic production was to be used." stating:-

(a) All facts and matters relied on by the Plaintiff to support its allegation that the new infringing mould facilitated more economic production;

Reply

The said request is a request for evidence; not entitled.

(b) Compare (sic) to what would the new infringing mould be more economic in terms of production.

Reply

Compared to the Taiwanese or any other single-cavity casing and single-knob cavity mould.

Under paragraph 15

Of the allegation that ".... the Defendant wrongfully misrepresented the cost of various components of the Clapper.":-

(a) Stating the contents of the misrepresentation in respect of the cost of each of the components referred to;

Reply

See Replies to Requests (1) (f) and (g) of Paragraph 14 above.

(b) Stating whether the misrepresentation in respect of each of the component cost was contained in writing or was made orally;

(c) If in writing, identify the document;

(d) If made orally, stating precisely when each of the oral misrepresentation was (sic) made, to whom of the Plaintiff were the misrepresentation made, by whom of the 1st Defendant were the misrepresentation made;

Reply

See Reply to Request 1(b), (c), (d) and (e) of Paragraph 14 above.

(e) Stating whether it is the Plaintiff's case that the misrepresentation in respect of the various component (sic) referred to contained statements of facts which turned out to be untrue;

(f) If the answer to (e) is in the positive, stating how each of those statements of fact are untrue.

Reply

See Replies to Requests 1(f) and (g) of Paragraph 14 above.

Under paragraph 16

Of the allegation that the production of the Clapper was "at an inflated price":-

(a) Stating all facts and matters relied on by the Plaintiff to support its allegation that the price was inflated;

Reply

The said request is a request for evidence; not entitled.

(b) Stating the exact amount of the inflated price;

Reply

(i) The same is peculiarly within the knowledge of ATC; not entitled.

(ii) The exact amount will be given following the Defendant's complete discovery herein.

(c) Stating in comparison with what prices was the price referred to therein inflated.

Reply

The same are peculiarly within the knowledge of ATC. Notwithstanding, the Plaintiff voluntarily gives the following particulars:

Market prices available in Hong Kong (and "delivered Hong Kong" on the world market for components) at the material times."

The O.18, r.19 (1) (a) application

18. Order 18 rule 19 - in so far as it is relevant -

provides -

"(1) The Court may at any stage of the proceedings order to be struck out or amended any pleading or the endorsement of any writ in the action, or anything in any pleading or in the endorsement, on the ground that -

(a) it discloses no reasonable cause of action or defence, as the case may be; or

(b) it is scandalous, frivolous or vexatious; or

(c) it may prejudice, embarrass or delay the fair trial of the action; or

(d) it is otherwise an abuse of the process of the Court;

and may order the action to be stayed or dismissed or judgment to be entered accordingly, as the case may be.

(2) No evidence shall be admissible on an application under paragraph (1) (a)."

19. The parties agree that - by reason of paragraph 2 - evidence is not admissible on an application under rule 19(1) (a).

20. In contradistinction, in an application under the Court's inherent jurisdiction, all the facts can be gone into and an affidavit as to the facts is admissible. (Willis v Earl Howe [1893] 2 Ch 545)

21. Thus, a strike out application may be, and frequently is, made both under the rules and under the Court's inherent jurisdiction, (Halsbury's Laws, Vol 37 (1982), para 436).

22. I was referred to a number of authorities on the principles which I should follow when considering the merits of a strike out application.

23. First, Kempster JA in P L Choy v Nissei Sangyo America Ltd [1992] 2 HKLR 177 at p183 where he referred to the "classic words" of Lindley MR in Hubbuck v Wilkinson [1899] 1 QB 86 at p91 as follows:

"Two courses are open to a defendant who wishes to raise the question whether, assuming a statement of claim to be proved, it entitles a plaintiff to relief. One method is to raise the question of law ... the other is to apply to strike out the statement of claim ... . The second and more summary procedure is only appropriate to cases which are plain and obvious, so that any master or judge can say at once that the statement of claim as it stands is insufficient, even if proved, to entitle the plaintiff to what he asks. The use of the expression 'reasonable cause of action' ... shows that the summary procedure there introduced is only intended to be had recourse to in plain and obvious cases."

24. I was also referred to Mr Justice Whitford in the The Upjohn Company v T Kerfoot & Co Ltd [1988] FSR 1 at p5 as follows:

"Equally, a long line of authorities has decided that it is only in the plainest and most obvious cases that it would be appropriate to strike out under this particular head and it has been held that a reasonable cause of action means a cause of action with some chance of success and, under this head, you have got to decide if there is a chance of success, considering only the allegations in the pleadings which go only to this, that the acts the subject of complaint, if proved, must make out an arguable case ..."

25. Thus, I have to bear in mind that all the Plaintiff has to show is that on the pleadings there is a cause of action with some chance of success or an arguable case and that I should only order strike out if it is plain and obvious that I should so do.

The Defendants' argument

26. The Defendants' fundamental attack is to complain of the manner in which the case - as set out in paras 14-16 and the relevant sections of the subsequent four sets of particulars - is pleaded. They say that it is not clear from such what case they have to answer and that the particulars provided - in so far as they are provided at all - are inadequate.

27. As to the paragraphs they say that it is not clear from a reading of such whether innocent, negligent or statutory misrepresentation is being alleged.

28. Further, there is no reference in the paragraphs to any collateral contract nor any explanation as to how prices were to be calculated. All there is is a reference to the 1st contract and that in turn merely refers to the two specified prices.

29. As to the First Particulars the Defendants make the following points.

30. First, the answer to the request under paragraph 14 - alleging misrepresentation of the cost of production because of the use in production of the infringing as distinct from the Plaintiff's mould - is in reality an answer to paragraph 15 - which alleges misrepresentation of the cost of various other components.

31. They say this is confirmed by the fact that the reply to the request under paragraph 15 is to refer merely to the answer under paragraph 14.

32. I do not see this as a problem. I understand paragraphs 14 and 15 to be allegations of overcharging both by use of a different mould and by misrepresenting the cost of components. The mould was arguably a component and I see no significant difference between the substance of the complaint in paragraph 14 and that in paragraph 15.

33. Second, the Defendants say that the particulars allege that the costs to the 1st Defendant were, and were known to the 1st Defendant to be, or to be likely to be, lower than those quoted to the Plaintiff. This, they say, is tantamount to an allegation of fraud.

34. Third, of the twelve documents referred to in the reply under paragraph 14, six of them - being numbers 1, 2, 5, 6, 11 and 12 - are irrelevant because their dates are inconsistent with either the first, second or third contracts. The first and second documents are dated 1985 and the pleadings do not refer to 1985, document 6 - dated the 18th of February 1987 - is subsequent to the second contract and the last two are subsequent to the third contract. Document 5 can't be found.

35. Mr Erving also complains that the answer to paragraph 15 is - as aforesaid - a reference back, that the answer that the exact amount of the inflated price is peculiarly within the Defendants' knowledge cannot be correct in that they must know what they paid for the Clappers, and that it is not sufficient to refer merely to market prices - they should set out what those prices actually were.

36. As to the Voluntary Particulars they say that they are repetitive, speculative and confuse the issue as to what components are complained of in that they refer to "all" component prices whereas the Statement of Claim referred merely to "various" components.

37. Mr Erving also says that the Defendants are entitled to know the exact nature of the oral misrepresentations.

38. As to the Third and Fourth Particulars he dismisses them as being merely repetitive.

Inherent jurisdiction

39. For this Mr Erving turned to the evidence.

40. He referred to cost comparison charts prepared by a Mr Stevens - an expert employed by the Plaintiff for this litigation - and to notes on such charts - again by Mr Stevens. He says that these show that - on the evidence - the Plaintiff does not have a case.

41. He also referred to a series of documents each headed "material list" which set out quantities, prices and the sources of about 40 different components. He says he is entitled to know in relation to which of these components there is alleged to be a misrepresentation.

42. The Defendants also complain that there is no allegation of loss, nor any prayer for relief consequent on, misrepresentation.

(The lack of such prayer is conceded by Mr Kat - who appeared for the Plaintiff.)

43. The remainder of Mr Erving's complaints centre on the fact - and this is more relevant to the appeal - that the parties are in dispute as to whether particulars should be delivered by the Plaintiff prior to discovery by the Defendants - or vice versa. The Plaintiff says that the actual costs of production are peculiarly within the Defendants' knowledge and that it is only after discovery of the cost production documents that they can particularise their case. The Defendants counter by saying that the Plaintiff ought to know what the costs were and therefore ought to be able to particularise before discovery. In any event they say that the discovery sought consists of million of documents and that hence discovery would be unreasonably onerous.

44. Mr Erving agrees that an application to strike out may be met by an application to amend or to provide further particulars. However, in this case, the Plaintiff maintains that there is no need to amend and indeed there is no such application before me. Further, not only does the Plaintiff not offer to provide further particulars but on the four previous occasions has - in the opinion of the Defendants - failed to so do effectively. Not only that, but it has refused to provide particulars to specific questions asked of it by the Defendants and has strenuously - and successfully - opposed the Defendants' application that the Plaintiff be ordered to provide such specified particulars.

45. In summary, Mr Erving says there is no sufficient claim on the pleadings, loss is not pleaded and there is no prayer for relief. In brief, the Plaintiff's claim in paragraphs 14, 15 and 16 is pure speculation and the Defendants can't tell what case they have to answer on misrepresentation.

46. I was referred to Belmont Finance Corporation Ltd v Williams Furniture Ltd [1979] 1 Ch 250 for the proposition that to plead fraud effectively the pleadings have to disclose with particularity the allegation that the Defendants had knowledge of dishonesty, to Newport (Mon.) Slipway Dry Dock & Engineering Co v Paynter [1886] 34 Ch D 88 for the proposition that where a Plaintiff's complaint is of false entries in books it must state what is the nature of the impropriety alleged against each item and that reasonable particulars are not given unless some idea is given of the nature of the inaccuracy alleged against the entries.

47. I was also referred to The Upjohn Co v T Kerfoot & Co Ltd [1988] FSR 1 as an example of a case where pleadings were struck out under the Court's inherent jurisdiction after the Court had looked at the evidence.

The Plaintiff's argument

48. Mr Kat's first argument was delay. He said that it was now too late to make a strike out application. May I say straight away that I agree with him. The Statement of Claim is dated the 13th of August 1990, (it was amended on the 5th of September 1990 but such did not affect paragraphs 14 to 16). The Fourth Particulars were delivered on the 23rd of April 1992. Thus, the Defendants have known of the paragraphs they now seek to strike out for over 30 months and of the particulars for about the last 10 months. Further, they filed their Defence and Counterclaim to the Amended Statement of Claim on the 1st of October 1990. If, as is now alleged, they are prejudiced and embarrassed by paragraphs 14 to 16 - because on their face they show no cause of action - then this must have been the case in October 1990. However, it appears that the Defendants' then legal advisers were in no such dilemma, because not only did they not apply for strike out but they pleaded to the paragraphs promptly as follows -

"45. Paragraph 14 of the Amended Statement of Claim is denied and the Plaintiff is put to strict proof thereof. The 1st, 2nd and 3rd Defendants further aver that the costs of production represented by the 1st Defendant to the Plaintiff represented the costs at which the 1st Defendant was willing to produce the said goods for the Plaintiff.

46. Paragraph 15 of the Amended Statement of Claim is denied. The costs of components represented by the 1st Defendant to the Plaintiff represented the price at which the 1st Defendant was willing to supply components for the manufacturing of the said goods.

47. Paragraph 16 of the Amended Statement of Claim is denied and the Plaintiff is put to strict proof thereof. Further, if, which is not admitted, the Plaintiff did rely on the alleged misrepresentation, the 1st, 2nd and 3rd Defendants aver that such reliance was unreasonable in all the circumstances of the case."

49. To my mind the Defence is not a mere denial but an averment that the costs represented by the 1st Defendant were the costs for which the 1st Defendant was willing to produce the goods and - in respect of the components - the price therefor.

50. It seems clear to me that the Defendants at that time considered that there was a cause of action to answer and that they could - and did - plead effectively to it. They were neither prejudiced nor embarrassed.

51. It is true - and Mr Erving emphasised this - that rule 19 provides that the Court may make the order at any stage of the proceedings but the relevant comment in the White Book is that the application should still be made promptly - and as a rule before the close of pleadings.

(White Book, 1993, Vol 1, para 18/19/2, page 332)

52. It is possible for the application to be made - and granted - after pleadings have closed but this is only done in exceptional cases, (Tucker v Collinson [1886] 34 WR 354).

53. In this case the pleadings closed on the 26th of July 1991 and I have not been persuaded that there is anything exceptional about the case such as to jusitify a strike out now - 19 months after close of pleadings.

54. Hence, on this ground alone I would refuse the application.

55. Mr Kat also opposed the application on the merits. I am also persuaded on this ground.

56. I cannot say that it is plain and obvious that paragraphs 14, 15 and 16 as they now stand are insufficient - if proven - to entitle the Plaintiff to damages.

57. They plead misrepresentation and their meaning is - as I have said - clear to me. They follow the standard precedent for statutory misrepresentation, (Atkin's Court Forms, Vol 27, (1991) page 186, Form 10), and Mr Kat has made it clear during this hearing that the intent is to allege statutory misrepresentation.

58. As to fraud, I agree with Mr Erving that it is insufficient - if the Plaintiff's intent was so to do - to introduce a plea of fraud by alleging knowledge in particulars served subsequent to the Statement of Claim. Again, in any event, Mr Kat has made it clear that they do not allege fraud - as of this moment.

59. As to the Plaintiff's chances of success I accept Mr Erving's complaints as to the lack of particularity as to the method by which the prices were to be arrived at. However, since I am permitted to look at the evidence, I assume that - and Mr Kat has confirmed this - the argument will be as sworn to by Mr Baum - Solicitors for the Plaintiff - in paragraph 5.5 of his affidavit dated the 4th of August 1990. The price to be paid was agreed to be based upon cost to the 1st Defendant plus 10% profit. It would of course be preferable if this was specifically pleaded but this defect is not sufficient - in my opinion - to justify strike out.

60. As to the complaint about the twelve documents, again, these complaints may well be valid arguments to be advanced at the actual trial but - as of this moment - I regard the Plaintiff's reference to them as being merely an attempt by it to indicate the manner in which it intends to prove its case. Whether - in the event - it will be able to rely successfully on each document remains to be seen.

61. The complaint about the failure to answer the query about the allegedly inflated prices I believe to be relevant more to the appeal than to the application. Again, the lack of particulars of the oral representations may weaken the Plaintiff's case at trial but is not in my view a fatal defect and the equivocation of the Plaintiff as to whether they complain about all or merely various components goes to the precision of their complaint but not to its right to exist.

62. As to the evidence Mr Erving referred to I hear what he says. He may or may not be right. Again I believe these to be matters relevant to the actual trial. On their face I cannot say that it is plain and obvious that the Plaintiff will not be able to prove its case.

63. As to the complaint about the prayer I regard this to be a mere technicality.

64. The Defendants are - or in my opinion should be - aware from a reading of the Statement of Claim that the Plaintiff complains of misrepresentation. Then, in paragraph 19, it alleges loss and damage "by reason of the matters aforesaid". Thus, an allegation of wrong doing is made and consequent loss pleaded. That should be sufficient to alert the Defendants to the reality that the Plaintiff is not so doing vacuously but because it intends to claim recompense for such.

65. I believe I am given clear guidance on this point by Buckley LJ in Belmont, ibid, at p269 thus -

"It is clear that a plaintiff cannot claim relief which is inconsistent with the relief that he has explicitly claimed; the authority for that is Cargill v Bower [1878] 10 CH D 502. But it appears to me that the court must have jurisdiction to grant any relief that it thinks appropriate to the facts as proved.

..."

66. As for the need to detail the nature of the impropriety alleged against each component I believe the Plaintiff has done this satisfactorily. It alleges overcharging and I do not believe it needs to specify the precise amount of overcharging in relation to each component. Again, the latter point is relevant more to the appeal.

67. Consequently I dismiss the application for strike out. I will hear the parties on the question of costs.

68. That disposes of the first application.

69. As to the appeal, the Order of Mr Justice Liu made it clear that this should be heard by the same judge and should be heard at the same time. Therefore, I direct that, if the Defendants wish to pursue the appeal, it be set down for hearing before me - on a date convenient to the parties' diaries - as soon as possible.

70. Dated this 19th day of March 1993.