PHILIPP DOODT AND OTHERS v. HUANG SHIHUA AND OTHERS

HCA 2482/2017

[2021] HKCFI 305

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 2482 OF 2017

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D E C I S I O N

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A.  Introduction

1.  There are two main matters currently before the court and one subsidiary matter.

2.  The matter first listed before me is the appeal brought by notice of appeal dated 27 May 2020 from Master Cruden’s decision of 14 May 2020, by which she dismissed the defendants’ application for security for costs made by their summons of 26 June 2019. Within that appeal is the subsidiary application by the plaintiffs to adduce further affidavit evidence.

3.  The second matter is the plaintiffs’ application for summary judgment made by summons dated 12 November 2020, seeking judgment for certain liquidated sums due and also on liability for damages to be assessed.

4.  They were listed to be heard together, with my permission, because it makes case management sense.  This is because the merits of the claim will necessarily be canvassed and considered in the context of the appeal.

5.  The Master’s decision to refuse security for costs was based both on her view of the merits of the claim and on the point relating to stifling of the claim.  On the merits, which she identified as focusing on the issue whether the plaintiffs would recover a monetary judgment for a sum greater than presently owed to the defendants and which she described as relatively modest, the Master was satisfied that such were the merits, that it would not be just to order the plaintiffs to pay security for the defendants’ costs.

6.  On stifling of the claim, and though agreeing that more information might have been disclosed by the plaintiffs, the Master was satisfied that the plaintiffs had demonstrated sufficient inability to pay any substantial security so that an order for security, if made, would probably stifle the claim.

7.  It is also necessary to refer to an earlier procedural application found in the decision of Deputy High Court Judge Blair dated 22 January 2020, following a hearing before him on 16 January 2020.  There, the Deputy Judge dealt with another appeal from another Master who had dismissed the plaintiffs’ application for an interim payment.  In the context of the present applications, the Deputy Judge’s reasoning and conclusions are important.  Both sides say so, though each focuses on different parts of the decision and reasoning.

8.  As the Deputy Judge noted, he was not actually dealing with an Order 14 application as there was not one before him, but the relevant test on an application for interim payment required consideration of whether the defendants had an arguable defence such as one would warrant the grant of unconditional leave in an Order 14 application.  Having carefully considered the various pleadings and the evidential material provided, the Deputy Judge reached the conclusion that the defendants had no arguable defence as might warrant the grant of unconditional leave in an Order 14 application.  But he refused to order an interim payment because he was not persuaded that there was a satisfactory basis for arriving at any particular estimate of damages which might properly be ordered.  I can return later to what is properly to be taken from that decision.

B.  Further Background

9.  By way of further background, the claim relates to a contractual dispute.  The factual background is sufficiently set out in the Deputy Judge’s decision at paragraphs 2 to 10 inclusive.  And the parties’ cases are also respectively set out in the Deputy Judge’s decision at paragraphs 11 to 21 inclusive.  I can gratefully adopt those summaries of the background and the parties’ cases by way of reference above, without repetition.

10.  Ms Euchine Ng, Counsel for the plaintiffs, has also offered what seems to me to be a brief and fair summary of the background to the contractual dispute which I can broadly adopt as follows.

11.  The 2^nd to 4^th plaintiffs (“AYNF”, “AYND” and “AYNS” respectively, together the “AYN companies”) are companies specialising in the sale and supply of garment accessories.  The AYN companies are controlled and managed by the 1^st plaintiff (“Philipp”), and his family members, including his father Paul and his brother Felix.

12.  The 2^nd defendant (“HSD”) is a zippers manufacturer controlled by the 1^st defendant (“Huang”). In 2012, Huang and Philipp entered into a joint venture cooperation whereby HSD appointed the AYN companies as the sole agent for distributors of zippers manufactured by HSD in Europe on a commission basis.

13.  The 3^rd defendant (“HSDI”) was incorporated as the joint venture vehicle to accept orders from end customers and to purchase from HSD zippers manufactured by HSD for distribution.

14.  In 2014, the parties renewed the terms of their cooperation and entered into an agreement dated 1 August 2014 (“2014 Agreement”).  In breach of the 2014 Agreement, HSD and/or HSDI failed to pay commission to the AYN companies since March or April 2017. Non-payment of that commission is not denied by the defendants.  The plaintiffs said that it was a repudiatory breach and accepted that repudiation so as to terminate the 2014 Agreement.

15.  In July 2017, they brought the present action to recover from the defendants the various unpaid commissions, together totalling approximately HK$425,000 and damages for loss of future profits which require to be assessed, being an unliquidated sum.

16.  There is, further, no dispute that the plaintiffs owe the defendants a sum of approximately HK$1.729 million which may be set off against the plaintiffs’ claim.

C.  Summary Judgment

17.  I agree with the parties that it is logical and sensible first to consider the application for summary judgment.  If judgment is granted, the appeal would likely fail.  Ms Ng says it must fail, and I think Mr Benny Lo appearing with Mr Tang Lik-hang as Counsel for the defendants accepts that.  His opposition is mainly based on his submission that it remains wholly unclear whether the plaintiffs would be entitled to any judgment for damages assessed at an amount greater than the admitted debt owed to the defendants.

18.  There is no need for me to set out at length the principles applicable on summary judgment applications because they are trite.

19.  In the first instance, it falls to the plaintiff to state his belief in the verifying affidavit that there is no defence to the claim, and this is to ensure that the application is kept in proper perspective, so as not merely to focus on what the defendant says.  The burden is then on the defendant to show a credible triable issue or an arguable defence, and in doing so to condescend upon particulars.

20.  The court does not necessarily take the defendant’s assertions at face value, but will test them against either undisputed facts or contemporaneous documents or the inherent likelihoods and probabilities.  However, there must not be any mini-trial on affidavit.

21.  Further, in an action for unliquidated damages, if the liability of the defendant is clearly established, including where the defendant does not satisfy its burden in the face of the summary judgment application, the court should give judgment for the plaintiff on liability with damages to be assessed.

22.  Both Ms Ng and Mr Lo have addressed me at some length on the arguments on the merits, at greater length in writing than their succinct and helpful oral submissions. I mean no disrespect to either of them if I do not recite their arguments at any great length.  Clearly, much if not all of the argument was, to an extent, ventilated on the interim payment appeal heard by the Deputy Judge.  Though not strictly bound by his findings, they are of course persuasive.

23.  In any event, having considered them, I find them correct and would agree with them.  There is no dispute that the defendants failed to pay the commission due under the 2014 Agreement between March and July 2017.  None of the purported defences relating to (1) the IT system, (2) the wrong entity, or (3) the alleged implied terms give rise to any arguable defence, although to be fair to Mr Lo, he does not push the points today in the light of the Deputy Judge’s findings.

24.  The core argument today relates to whether the plaintiffs have demonstrated that they will receive more in assessed damages than the roughly HK$1.3 million, being the difference between the commission debt owed to the plaintiffs and the debt which the plaintiffs admit owing to the defendants.  Mr Lo submits that the case is pregnant with uncertainties and he says that this is what was recognised by the Deputy Judge, leading to his refusal to order an interim payment.

25.  But I do not think Mr Lo is correct to suggest that the Deputy Judge found a triable issue as to whether there would be any future commissions payable at all.  Rather, he found no defence on liability and that would necessarily lead to an assessment of damages.  What he was not prepared to do was to order any interim payment where he was not satisfied of either figure put forward as the appropriate interim payment figure to order and where no other figure was suggested or could simply be assumed.

26.  So I do not agree with Mr Lo when he suggests that the plaintiffs have lifted the Deputy Judge’s findings that the defendants have failed to show any arguable defence or triable issues on liability out of context.  Indeed, at the end of the judgment, having considered the various aspects of the application, he reiterated that the defendants had failed to show any arguable defence, and he clearly had in mind when saying so the application of the Order 14 test.

27.  I agree with Ms Ng that there is no defence on liability, even taking into account the debt owed by the plaintiffs.  Like the Deputy Judge, I am satisfied that there must be some future commission assessed as damages greater than the debt, and that the evidence demonstrates that the plaintiffs will at least recover some damages which, together with the unpaid commission, will extinguish the debt.

28.  I do not think it necessary to look in any detail at the various offered calculations.  The plaintiffs have the benefit of an expert report suggesting damages should be assessed at a figure of around HK$40 million for the remainder of the 10-year contractual term which would, but for the breach, have expired only in 2024.  Ms Ng recognises that figure is on the high side, as did her predecessor who appeared before the Deputy Judge.  But she points out the various calculations offered as to the amount of commission only for the period until July or August 2018, a period of roughly one year after the repudiatory breach was accepted so as to terminate the 2014 Agreement in July 2017, would be readily sufficient fully to extinguish the debt.

29.  On the other hand, Mr Lo submits that such were the problems in the relationship between the joint venture parties that it is impossible to say, on a summary basis, that the relationship would have continued on the terms of the 2014 Agreement even until mid-2018.  He points to the evidence of negotiations at least at times initiated from the plaintiffs’ side and the suggestion that the main joint venture vehicle, HSDI, would be discarded.  However, it is clear that the plaintiffs were making suggestions on the basis that the commission would continue to be payable to them basically on the same basis as under the 2014 Agreement.  That is not surprising, as that is how the plaintiffs earned their elements from the joint venture arrangement, whereas the defendants’ side earned theirs from the manufacturing process.

30.  Mr Lo also points out the difficulties in relation to HSDI were not caused by the breach in the failure to pay commissions but as a result of long-term operational losses, cumulatively reaching a figure which both sides regarded as broadly unacceptable.  So he submits that it is not clear that the 2014 Agreement would have continued or that the commission-paying entity would have continued to be the same, or that any commissions would have continued at the same rates, or on the same conditions.

31.  However, I do not think those points change the analysis.  The parties had been negotiating the possibility of restructuring since at least late 2015 but had so far failed to reach agreement before the termination of the 2014 Agreement following the plaintiffs’ acceptance of the defendants’ repudiatory breach in July 2017.  Absent the breach and its acceptance, there is no evidence properly to suggest that the 2014 Agreement would not have carried on.  In any event, it seems to me that any new agreement as might have been put into place would still have been on the basis that the plaintiffs would be seeking and obtaining commission as their method of profiting from the joint venture.

32.  So I agree with Ms Ng that even a new venture would likely be causatively linked, and that absent the breach there would continue to have been the generation of commissions for a significant period.  There is also force in Ms Ng’s point that what caused the result leading to the damages claim is simply the repudiatory breach and the non-payment of commission, even if there were also potential restructuring plans which might have come into fruition.

33.  I also therefore do not accept Mr Lo’s submission that the issues of liability and quantum are inseparable in the sense he suggests, namely, that it is impossible to say that there is no triable issue as to whether the plaintiffs would recover more than HK$1.3 million in assessed damages.  This is a contractual claim and the finding on liability does not require proof of any particular damage even if the full extent of the liability has not yet been assessed.

34.  Whilst it is correct that there is a counterclaim and that to achieve a net monetary award in their favour, the plaintiffs must obtain damages for future lost commissions greater than approximately HK$1.3 million, that does not seem to me to mean that, until that amount is assessed, the defendants are not liable to the plaintiffs at all.  I think that is what the Deputy Judge meant in his approach to the interim payment application, and I agree that the quantum may be fact-sensitive or may require complex considerations, including of the expert evidence.  That it is not possible now to be reasonably sure of any particular amount in excess of $1.3 million as might have been ordered by way of interim payment does not seem to me to make this case one not suitable for summary judgment on liability.  I would therefore grant summary judgment.

D.  Security for Costs

35.  As to the question of security for costs, I would deal with the matter in any event.  The plaintiffs do not dispute the court has jurisdiction to grant security against them either because they are outside the jurisdiction or because there is reason to believe that they will not be able to satisfy a costs order made against them if the defendant succeeds in its defence.

36.  Similarly, on consideration of the merits, Mr Lo accepts that the plaintiffs’ claim is arguable but he says that considering the admitted cross-debt in the sum of roughly HK$1.729 million and the complexity of the case requiring the assistance of a business forecast expert where there is a high degree of uncertainty at present, the plaintiffs’ claim cannot be said to have a high probability of success.  Put shortly, Mr Lo says that to succeed to a monetary judgment, the plaintiffs must prove that the asserted lost opportunity to earn future commissions exceeded that debt.

37.  The phrase “high probability of success” is relevant on the applicable legal principles which include:

(1)  The court may order a plaintiff to give such security for a defendant’s costs of the action as it thinks just.

(2)  The discretion is wide and unfettered.

(3)  Normally, a court will order security for costs against a plaintiff resident abroad as ordinarily it is just to do so.

(4)  The same point might be made in relation to an application under section 905 of the Companies Ordinance, Chapter 622, where there is reason to believe the plaintiff has an inability to pay costs.

(5)  The application for security is not an occasion for the court to go into the merits of the case in any detail, save in relatively simple cases where on affidavit evidence the court can already see that there is a high degree of probability of success for the plaintiff.

(6)  Any argument that an order for security for costs would stifle a claim makes it incumbent on the plaintiff to adduce evidence in support, showing not only itself but also its shareholders or other funding parties are unable, rather than merely unwilling, to provide the security if ordered.

(7)  Any such evidence produced by the court should be full and frank, and the court should scrutinise what it is told with a critical eye and may draw adverse inferences from any unexplained gaps in the evidence.

(8)  But whilst there should be scrutiny, that does not necessarily mean that there must be scepticism.

38.  I do not need to repeat the matters relating to the merits.  But in the context of the security for costs appeal, Mr Lo again relies on the Decision of the Deputy Judge, and in particular, at paragraphs 64 to 67.  As pointed out, there the Deputy Judge identified that it was not easy to adopt even a broad-brush approach to estimate likely damages and rejected both the full figure of HK$40 million claimed or the supposedly customary two-thirds of that sum, noting also no other possible figure was put forward.

39.  But as already stated, I do not think that means he found there to be a triable issue on liability.  Instead, he said the opposite, though he envisaged it would be necessary for there to be a proper assessment of damages.  Even had I found the case not suitable for the grant of summary judgment on liability, I would nevertheless have found a high degree of probability of success, which seems to me to point strongly against the making of any order for security for costs.

40.  As to the point of stifling the claim, the plaintiffs have applied to put in three further affidavits by which they seek to bolster their evidence.  That application is opposed by the defendants.  The relevant legal principles for adducing new evidence on appeal from a master to a judge require the applicant to identify special grounds akin to satisfying the conditions laid down in Ladd v Marshall, albeit with an overarching discretion to act in the interest of justice even if not all such conditions are met.

41.  Ms Ng says the new affidavits are to update the court as to the financial position of the Doodt family and the AYN companies, in particular, following the impact of COVID-19.  Acknowledging that some of the matters referred to could not satisfy the Ladd v Marshall conditions, Ms Ng seeks indulgence to provide a current and complete picture.

42.  Mr Lo says the application should fail where the plaintiffs have patently and admittedly failed to meet the necessary test for filing further evidence under Rules of High Court, Order 58 rule 1(5).  He emphasises that the court should do nothing that might encourage parties seeking to adduce further evidence on appeal either after an unfavourable decision from a master or criticism of evidence at the hearing before the master.  Indeed, this is not a case where the plaintiff alleges a change of its financial position after the hearing before the Master.  Rather, the new affidavits are an attempt to patch up its case on its financial position.  This is precisely what the rules are intended to prevent.

43.  I agree with Mr Lo that much of the evidence could and should have been before the Master.  Further, the updated material, mainly in bank statements, probably adds little of significance to the outcome of the case where those statements post-date the master’s decision and do not show what happened in the period before it.  Therefore, I would disallow the new affidavits and dismiss the summons with costs to be summarily assessed.

44.  On the original evidence, I agree with the Master that there are areas where the evidence might have provided further information.  But I think I would have been satisfied that the apparently strong claim would probably be stifled by any order for security for costs in any substantial sum.  In any event, balancing the merits of the claim against the risks, if not probability, of stifling, I would have tended to a decision overall not to order security.

45.  In the circumstances, I do not propose to address the quantum of any security for costs as might have been ordered, save to say that I acknowledge the point made by Mr Lo that I might have ordered a sum lower than the sum of the roughly HK$1.5 million claimed if I had been satisfied that that might be the way to provide some substantial security, albeit not in an amount that would otherwise have stifled the claim.

E.  Result

46.  Of course, in light of the grant of summary judgment, the decision on the appeal is strictly unnecessary.  But, formally, I would dismiss the appeal with the costs of the appeal to be paid by the defendants to be summarily assessed.

47.  I would order instead summary judgment that:

(1)  HSD do pay to AYNF the liquidated sum of HK$130,934.70.

(2)  HSD do pay to AYND the liquidated sum of HK$215,458.65.

(3)  HSDI do pay to AYNS the liquidated sum of HK$78,348.60.

(4)  Interest on those sums be payable at 1 per cent over Hong Kong prime from the date of the writ until judgment, and thereafter at judgment rate until payment.

(5)  Judgment on liability be entered against Huang, HSD and HSDI for damages and interest thereon to be assessed.

(6)  Costs of the application for summary judgment to be paid by the defendants to be summarily assessed.

(Discussion re costs of the action)

48.  So what I can make clear, I suppose, is that the remainder of the costs of the action be reserved.