QIANHAI XINHUAKANG FINANCIAL HOLDINGS (SHENZHEN) LTD v. CHEN JIARONG AND OTHERS

HCA 377/2018

[2020] HKCFI 823

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 377 OF 2018

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HCA 1508/2019

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1508 OF 2019

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____________

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DECISON

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1.  This is an application by the Plaintiff to re-amend its Amended Statement of Claim in HCA 377/2018 (“the 2018 Action”). As the Defendants object the amendment application (“the Amendment Application”) on the ground that some of the proposed re-amendments relate to new causes of action which only accrued after the writ, the Plaintiff also commenced new proceedings in HCA 1508/2019 (“the 2019 Action”) to protect its interest. The Statement of Claim in the 2019 Action reproduces the new causes of action included in the proposed re-amendments in the 2018 Action (“the Amendments”). There are also before me two applications to consolidate the 2018 and 2019 Actions (“the Consolidation Applications”).

BACKGROUND OF THE PLAINTIFF’S CLAIMS

2.  The background of the Plaintiff’s claims are as follows.  The 1^st and the 2^nd Defendants are father and son (hereinafter referred to as “the Father” and “the Son” respectively).  They hold various shareholding and directorship in a web of corporate entities whose names include the word “Kingkey”, including the 3^rd to 7^th Defendants.  I will refer the 1^st to 7^th Defendants as “the Kingkey Parties”.

3.  In or around July 2017, the Plaintiff began to take part in a bid (by invitation) for AXA Wealth Management (HK) Ltd (“the Target”).

4.  As a result of the Plaintiff’s decision to seek a joint venture partner for the acquisition, in November 2017, the Plaintiff and the Kingkey Parties entered into an agreement (“the Agreement”) whereby they would jointly acquire the Target, and in the event that it was successful, operate the Target with a view to sharing the profit obtained therefrom.  The Plaintiff’s and the Kingkey Parties’ interests in the Target or the joint venture (“the Joint Venture”) would be 20% and 80% respectively.

5.  It is the Plaintiff’s case that the Agreement was partly oral, partly written and party inferred from conduct.  The written component of the Agreement consists of 2 framework agreements (“the 1^st and 2^nd Framework Agreements”).  The stated parties of those agreements were the 5^th and 6^th Defendants respectively, but the Plaintiff claims that they were entered into on behalf of each of the Kingkey Parties.

6.  It is also the Plaintiff’s case that the Son and other representatives of the Kingkey Parties entered into the Agreement on behalf of each of the Kingkey Parties, and the 8^th Defendant, Jeneration Holdings Limited (“Jeneration”), became a party by virtue of adoption.

7.  On the other hand, the Father contends that he and the companies he controlled, including the 5^th to 7 Defendants, had nothing to do with the Joint Venture.  These Defendants claim that the Son and the companies he controlled, including the 3^rd, 4^th and subsequently the 8^th Defendants (the last being Jeneration), were the only parties involved in Joint Venture.  The Father’s camp and the Son’s camp of Defendants are separately represented by two teams of legal advisors.  Though the ownership and control of the different corporate entities would be matters for further investigation, for easy reference, I will refer the Son, the 3^rd and 4^th Defendants and Jeneration as “the Son’s Group” and the Father and the 5^th to 7^th Defendants as “the Father’s Group”.

8.  The Father and the 7 Defendant have previously taken out a striking out summons on the ground that, inter alia, the pleaded case on agency is defective (“the Striking Out Application”). That application was dismissed.[1]

9.  After signing the 1^st Framework Agreement, the Plaintiff claims that it introduced the Kingkey Parties to the professionals who therefrom acted on behalf of some or all of the Kingkey Parties and the Plaintiff (“the Clients”).

10.  On 13 November 2017, the Clients made a joint final offer to the vendor, AXA China Region Ltd (“the Vendor”), to acquire the Target.  On 15 December 2017, the Clients were informed by the Vendor that they were the successful bidders.

11.  On 22 December 2017, the Plaintiff gave consent to the execution of a share sale agreement (“the SSA”) for the purchase of the Target by Jeneration, a corporate vehicle allegedly controlled by the Kingkey Parties, on the understanding that it would subsequently receive 20% interest in the Target or Jeneration.

12.  However, immediately after the execution of the SSA, the Kingkey Parties informed the Plaintiff that they would proceed with the acquisition alone.  Further, the Kingkey Parties have refused to account to the Plaintiff its 20% interest in the Target.

13.  There is dispute between the parties as to why the Defendants proceeded to acquire the Target alone.  The Defendants claim that, as there was indication the original bidding price of $2.1 billion was too low, the Son’s Group decided to increase the bidding price to $2.2 billion which was rejected by the Plaintiff.  The Son’s Group therefore proceeded to acquire the Target alone.

14.  On the other hand, the Plaintiff claims that, on 27 December 2017, Mr Li Shaohui, a representative of the Kingkey Parties, informed the Plaintiff that the Kingkey Parties were willing to offer compensation.  It is the Plaintiff’s case that, by doing so, the Defendants admitted the breach of the Agreement.

15.  The Plaintiff commenced the 2018 Action and has pleaded the following causes of action against the Defendant: (i) breach of contract; (ii) Pallant v Morgan equity; (iii) breach of fiduciary duty; and (iv) knowing receipt. It makes a proprietary claim with respect to 20% interest in the Target.  It also seeks specific performance of the Agreement, and further and alternatively, damages.

16.  For the breach of contract claim, the Plaintiff’s complaint is that the Kingkey Parties had: (i) refused to procure the transfer of 20% interest in the Target to the Plaintiff; (ii) exploited the business opportunity to the exclusion of the Plaintiff; and (iii) failed to pay the agreed reward to the Plaintiff.

17.  In support of the Pallant v Morgan equity claim, the Plaintiff claims that:

(i)  Where two parties enter into a joint venture arrangement whereby it is contemplated that one of them will acquire property and that, if he does so, the other will obtain an interest in the property, and the property is acquired, whether by the acquiring party himself or by a company owned by him, a Pallant v Morgan equity arises and the property will be held on constructive trust in accordance with the pre-acquisition arrangement.[2]

(ii)  Generally, there must be: (a) a pre-acquisition arrangement or understanding though this need not be contractually enforceable; and (b) the non-acquiring party has conferred an advantage on the acquiring party or suffered a detriment in relation to the acquisition of the property.[3]

(iii)  As to pre-acquisition arrangement, the Plaintiff relies on the Agreement.  As to the advantages to the Kingkey Parties, the Plaintiff claims that those included the opportunity in respect of the Target which was attributable to the Plaintiff’s sole contact and efforts and would not have been open to the Kingkey Parties but for the Plaintiff’s introduction, and the fruits derived from the work and expenses of the Plaintiff before the Kingkey Parties were involved.

18.  For the claim for breach of fiduciary duty, the Plaintiff claims that, as its joint venturer, the Kingkey parties owed fiduciary duties to the Plaintiff, on account of its similarly to a partnership.[4] Alternatively, this is a case of ad hoc fiduciary relationship arising from the trust and confidence reposed by the Plaintiff on the Kingkey Parties.

19.  As to the claim for knowing receipt, the Plaintiff says that Jeneration and the 3^rd Defendant (who holds Jeneration) were knowing recipients of the 20% interest in the Target which was acquired by reason of breach of fiduciary duties.

EVENTS SUBSEQUENT TO THE ISSUE OF THE WRIT

20.  On 22 March 2019, the SSA was terminated by Jeneration on the basis that approval from the Hong Kong Insurance Authority (“HKIA”) could not be obtained before the agreed long stop date (“the Long Stop Date”).  The Plaintiff says that it was Jeneration, not the Vendor, who initiated the termination.

21.  On 16 May 2019, the Son’s Group applied to amend their Defence by pleading:

(i)  the failure to satisfy the regulatory conditions (“the Regulatory Conditions”) and the termination of the SSA; and

(ii)  lack of causation, i.e. even if there had been no breach on the part of the Kingkey Parties, regulatory approval would still not have been obtained, the acquisition would still not have been completed, and the Plaintiff would still not have acquired any interest in the Target.

22.  On 17 May 2019, I granted leave to the Son’s Group to make such amendments to their Defence.

23.  On 24 May 2019, and upon an order made by me, the Son’s Group produced: (i) Jeneration’s termination notice to the Vendor on 22 March 2019 (“the Termination Notice”); and (ii) the Vendor’s acknowledgment of the Termination Notice on 27 March 2019.

24.  According to the Termination Notice, the Vendor contended that Jeneration had failed to use best endeavours to procure the satisfaction of the Regulatory Conditions.

THE AMENDMENTS

25.  According to the Plaintiff, the Amendments cover two broad areas which are prompted by the Amended Defence and the said two documents disclosed by the Son’s Group.

26.  The first area concerns the relief of specific performance and the date of assessment of damages.

27.  Given that the Plaintiff’s ability to claim the contemplated 20% interest in Jeneration or the Target is destroyed or rendered practically meaningless following the issuance of the Termination Notice, the Plaintiff is now forced to, and does, abandon the claim for specific performance.

28.  Whilst the general rule is to assess damages for breach of contract as at the date of breach, the court can fix such other date as may be appropriate to avoid injustice. If the innocent party has reasonably continued to try to have a contract completed by seeking performance, the date of assessment may be postponed to a date on which the contract was lost, or when specific performance was aborted.[5]  Hence, the Plaintiff claims that the date of assessment of damages should be: (i) 24 June 2019, the date on which the Plaintiff reasonably abandoned the specific performance claim by taking out the Amendment Application; or alternatively (ii) 22 March 2019, the date on which the SSA was lost; or alternatively (iii) 22 December 2017, the date on which the repudiatory breach was first committed.  The Plaintiff also reserves the right to seek some future date for the assessment of damages.

29.  The second area relates to the plea of the Sons’ Group for lack of causation.  In essence, the Son’s Group say that the effective cause of the Plaintiff’s loss of its contemplated 20% interest in the Target is not the Kingkey Parties’ breach, but the termination on 22 March 2019 which was prompted by the non-breach event of the HKIA refusing to grant approval by the Long Stop Date.

30.  Though full discovery has yet been made, the Plaintiff contends that, even based on the existing materials, the effective cause of the Plaintiff’s loss is one or some or all of the following:

(i)  The very existence of this litigation which casted doubt on the identity of the controlling shareholders and caused the HKIA to refuse to proceed, in which case, the loss still flows from the Kingkey Parties' original breach.

(ii)  The Kingkey Parties had failed to apply for regulatory approval using best endeavours, which is apparent from the circumstances under which the failure to obtain regulatory approval and the termination occurred, most pertinently the Vendor’s allegation as recorded in the Termination Notice.

(iii)  The Kingkey Parties’ decision to terminate the SSA when there was no indication from either the HKIA or the Vendor that regulatory approval or a potential extension to the Long Stop Date was beyond salvage.

31.  In response to the “lack of causation” plea, the Plaintiff claims that the Defendants cannot benefit from their own wrongs.  They cannot rely on their subsequent wrongs so as to break the causal connection between their original wrongs and the Plaintiff’s loss[6], a fortiori if the event said to have broken the causal chain is a consequence of the original breach.

32.  According to the Plaintiff, the Amendments therefore plead the following additional breaches or wrongful conducts allegedly committed by the Kingkey Parties with respect to the second and third causes set out in §30 above.

33.  The first one is breach of contract.  The Amendments plead 3 additional implied terms necessary for business efficacy, namely: (i) a duty to pursue the acquisition using best endeavours or alternatively reasonable care and not to deliberately or negligently do anything which frustrates its object; (ii) a duty to deal with any right or property acquired pursuant to the Agreement using reasonable care and in good faith; (iii) a duty not to dispose of any right or property acquired pursuant to the Agreement without the other party’s consent, particularly in view of the agreed terms contained in a Term Sheet which was allegedly part of the shareholders’ agreement between the parties (“the Term Sheet”).  The decision to terminate without the Plaintiff’s consent was a breach of duties (i) and (iii), whilst the failure to obtain regulatory approval using reasonable endeavours was a breach of duty (ii).

34.  The second one is breach of duties as trustees of the Plaintiff. As constructive trustees of the Plaintiff, whether as a result of Pallant v Morgan equity or unauthorised profit obtained by a fiduciary, the Kingkey Parties owed: (i) a duty to transfer the trust asset to the Plaintiff when directed; (ii) a duty to preserve the trust property and not to dispose of it without the Plaintiff’s consent; and (iii) an equitable duty of care with respect to the trust asset. Such duties arise from either the contractual implied terms set out above, or alternatively the constructive trusteeship[7]. The Plaintiff contends that the decision to terminate without the Plaintiff’s consent was a breach of duties (i) and (ii) above, and the failure to obtain regulatory approval using reasonable endeavours was a breach of duty (iii).

35.  The third one is knowing receipt.  The Plaintiff claims that as knowing recipients, Jeneration and the 3^rd Defendant were in a position analogous to a bailee, which came under a duty of care in relation to the owner of the property.[8]  Accordingly, they owed similar duties as that of a constructive trustee.

36.  The fourth one is negligence.  It is alleged that the duty of care, similar to the equitable duty of care, arises from the Hedley Byrne line of cases which impose a duty of care with respect to pure economic loss when there is an assumption of responsibility.  Such assumption is usually found when there is a contractual or fiduciary relationship.[9] The Plaintiff also pleads the Caparo test which is sometimes adopted as an alternative test in this area.[10]

37.  According to Mr Man, SC, counsel for the Plaintiff, the additional breaches are not pleaded as new claims per se; they are primarily pleaded to respond to the plea on lack of causation against the original claims, defensive in nature, and consequential to the amendments in Amended Defence.  The Amendments supply further reasons for the original claim for the 20% interest in the Target.  They are therefore “amendments which allow the real dispute in the case to be determined” rather than “one which introduces into the action a cause of action which could be said to be incurably bad”.  Further, it is convenient to allow the introduction of the new breaches because they affect whether relief under the original claims should be granted.

38.  I now go to the specific Amendments.

39.  First, there is no dispute that the court should allow the re-amendments in §§16.2 and 17 of the draft.

40.  The other amendments are contained in the following paragraphs:

(i)  §§31.3 to 31.5 which relate to the plea for additional implied terms in the Agreement;

(ii)  §41 which relate to a plea that the “Pre-Acquisition Arrangement” was made with the Kingkey Parties rather than the Son’s Group;

(iii)  §§59A to 59I which relate to the termination of the SSA by Jeneration;

(iv)  §§64A to 64G which relate to the additional claim for constructive trust and the plea to oppose the “lack of causation” argument;

(v)  §71A which relates to the additional claim for breach of fiduciary duty;

(vi) §§77A and 77B which relate to the additional claim for knowing receipt;

(vii)  §§80 to 80I which relate to the additional claim for breach of contract and the plea for assessment of damages in light of the subsequent events;

(viii)  §§82A to 82F which relate to the additional tort claim.

41.  For the claim relating to breach of contract, the Son’s Group do not oppose the amendments which relate only to the date of assessment of damages, i.e. §§80E-I.  The Plaintiff’s amendments to substantively abandon its specific performance claim, §§80A-80B, are likewise not opposed.  Apart from such concessions, the Defendants oppose the other amendments.

42.  In the prayer for relief, the Plaintiff abandons the claim for specific performance.  Such amendment is uncontroversial.

43.  The objections basically fall into two broad categories: the first one is that the Amendments introduce new causes of action which did not exist at the time of the writ in the 2018 Action (which can only be done if the Defendants consent), thereby infringing the Eshelby rule; and the second one is that the new claims contained in the Amendments, which are based on subsequent events, are bound to fail and so the court should not allow the Amendments.

LEGAL PRINCIPLES ON AMENDMENT OF PLEADINGS

44.  The parties accept that the principles concerning amendments to pleadings are well established and summarised in Hsu Ming Chi v Lam Shu Chit:[11]

“13. It is a guiding principle of cardinal importance on the question of amendment that generally speaking, all such amendments ought to be made ‘for the purpose of determining the real question in controversy between the parties to any proceedings or of correcting any defect or error in any proceedings’: Re Playmates Investments Ltd [1996] 4 HKC 577 at 582E-H (per Le Pichon J as she then was); Natamon Protpakorn v Citibank NA [2009] 1 HKLRD 455 at para. 25 (per Cheung JA); Hong Kong Civil Procedure 2014 Vol. 1 para. 20/8/6.

14. Leave is readily granted to amend before trial unless it can be shown that the new claim based on the proposed amendment is bound to fail. While the court is entitled to have regard to the merits of the case, it should only do so when the merits are readily apparent, and are so apparent as not to require prolonged investigation: Natamon Protpakorn v Citibank NA supra at para. 25 (per Cheung JA).

15. If the proposed amendments are bound to fail, no leave to amend should be granted. In this regard, the court will take the applicant’s proposed pleaded case to the highest: Bank of China v Leigh Hardwick unrep., HCA 1110 of 2006, 28 August 2013, per Anthony Chan J at para. 2.

16. Absent any real prejudice, an application for amendment, albeit late, must be decided upon the general principle that a court of law seeks to adjudicate on the real issues and disputes between the parties and, if possible, technical and procedural rules should not stand in the way of allowing the parties to raise their real claims or defences before the court for adjudication: VSC Building Products Co Ltd v Kono Insurance Ltd., unrep. HCA 947/2005, 9 September 2009, per A Cheung J (as he then was) at [22].

17. Where prejudice is claimed, the burden is on the party opposing the amendment to show prejudice. There is no injustice to the opposing party if he can be compensated by appropriate orders as to costs: Re Playmates Investments Ltd supra at 582H, 584C (Le Pichon J as she then was).

18. Lastly, in giving effect to the underlying objectives of the Rules of the High Court, including those concerning amendments, the court shall always recognize that the primary aim in exercising the powers of the court is to “secure the just resolution of disputes in accordance with the substantive rights of the parties”: RHC O 1A r 2(2).”

MERITS OF THE AMENDMENT APPLICATION

45.  As all the Defendants seek to object the Amendments on the ground of the Eshelby rule, I will deal with such objection first.  After that I will deal with the other specific objections raised respectively by the two groups of Defendants.

(i)   Objection based on the Eshelby rule

46.  The Eshelby rule originated from the case of Eshelby v Federated European Bank Ltd[12], which provides that a statement of claim cannot be amended to introduce a cause of action which was not in existence or had not yet accrued at the time of the issue of the writ.[13]

47.  The Eshelby rule is a matter of some debate in recent years.  In particular, O 18 r 9 of the RHC, which has been added after Eshelby, seems to suggest a more flexible approach.  The said rule reads:

“Subject to rules 7(1), 10 and 15(2), a party may in any pleading plead any matter which has arisen at any time, whether before or since the issue of the writ.”

48.  The more flexible approach is supported by a series of English decisions.

49.  InVax Appliances Ltd v Hoover Plc^[14], Mummery J was of the view that, given the wide discretion under O 20 r 5(1)[15], the Eshelby rule is not an absolute one.  In that case, the defendant had been sued in respect of infringement of a patent for a cleaning head.  Initially the counterclaim had sought revocation of the patent.  Later the defendant had redesigned the cleaning head which it manufactured and sought, in the alternative, a declaration of non-infringement by the redesigned head as part of the counterclaim.

50.  As the redesigned cleaning head only came into existence later, the defendant did not have a cause of action at the time of the counterclaim.  Yet the re-amendments were allowed because:

(i)  It was not a case where the plaintiff had no cause of action at all at the date of the writ, specifically a situation where if the cause of action was subsequently acquired; in that type of case the writ was incurably bad and not capable of being made good by amendment, since it was not a case of adding or substituting a new cause of action by amendment.^[16]

(ii)  Further, it was convenient to allow the introduction of the claim of non-infringement because the same arguments might also have affected the form of the injunction which would be granted.^[17]

51.  Evans LJ echoed the flexible approach in Hendry v Chartsearch Ltd^[18]:

“20. The plaintiff appeals on the ground that the judge was wrong to rely upon Eshelby and wrong to exercise his discretion as he did. Mr Freedman QC for the respondents accepted that the judge had a discretion and submitted that it was exercised correctly. His eventual reason is simply that the plaintiff had no cause of action or no related or analogous cause of action at the date of the writ.

21. In my judgment, the judge was wrong not to adopt the approach spelled out in Vax Appliances Ltd. There, Mummery J considered the earlier judgments both in Eshelby and in Roban Jig and Tool Co Ltd and he took account also of the provisions of RSC, O. 18, r. 9:

‘Subject to [certain rules which are not material for present purposes] a party may in any pleading plead any matter which has arisen at any time, whether before or since the issue of the writ.’

This rule, which was introduced post-Eshelby in 1962, is in the most general terms, as is the court's general power to grant leave to amend a pleading under O. 20, r. 5(1). Mummery J so observed (p. 661). He effectively distinguished Roban Jig and Tool Co, where leave to amend was refused, because ‘the plaintiff had no cause of action at all at the date of the writ’ and ‘there was no cause of action to add to or be the subject of substitution’. In Vax Appliances, on the other hand, the defendant (seeking leave to amend the counterclaim) did have a cause of action at the date of the service of the counterclaim (p. 661)

22. Mr Freedman submits in effect that it follows from this passage and from the judgments in Roban Jig and Tool Co that leave to amend cannot or should not be given unless the party seeking leave to add a fresh cause of action had some cause of action at the date of the writ (or counterclaim). This would amount to a significant restriction on the apparently general discretion given by O. 20, r.5(1) and O. 18, r. 9.

23. I would reject this submission. The scope of the RSC has been extended since the days when Eshelby was decided in 1932. In accordance with modern practice generally, the court has a general discretion which should not be restricted by hard-and-fast rules of practice, if not of law, such as that which is suggested here. The judge therefore was wrong to consider that the court had no power to give leave to make the re-amendment. In my view, he was wrong also to consider that the discretion was somehow restricted by what he called ‘the principle set out in Eshelby and in Roban. It is a general power which in modern parlance has to be exercised in accordance with the justice of the case.

24. I therefore proceed to consider whether leave should be granted in the present case. The statement of claim in its original and amended forms contains a clear statement of the causes of action relied upon under the exploitation agreement. The claims are made in the name of the plaintiff although it is also pleaded that the contracting party was Interface. The purpose of the re-amendment is to specify the reason why the plaintiff alleges that he is entitled to bring the claim. The cause of action remains the same: the additional facts cause no prejudice or embarrassment to the defendants. I cannot see any ground for refusing leave to make the re-amendment, and as the exploitation agreement does not contain an assignment clause there is no contractual basis for objecting to the amendment. In any event, I do not consider that the tort claim so lacks ‘viability and substance’ that the case is equivalent to Roban Jig, where the plaintiff had no existing cause of action at the date of the writ.”

52.  In Wing Siu Co Ltd v Goldquest International^[19], the Court of Appeal considered these English authorities and affirmed that the Eshelby rule still existed under Hong Kong law.  However, given that it included an exception where the defendant consented, it could not be an absolute rule.^[20]

53.  Roger VP said the following in the judgment:

“17. The distinction which was thus drawn by the Court of Appeal in the case appears to be between permitting an amendment which allows the real dispute in the case to be determined and one which introduces into the action a cause of action which could be said to be incurably bad because it did not exist at the date of the original claim. Both Ward LJ and Chadwick LJ in the Maridive case expressed the view that there should be a flexible attitude dependent on the justice of the case.

18. In the light of those cases it cannot be said that the original rule in the Eshelby case has disappeared. The courts in England have clearly been disposed to adopt a more flexible attitude, specifically, where they have permitted the pleading of subsequent events which clarify why a claim could be made based on a cause of action which existed at the date of the issue of the writ. No decision has been brought to our attention which has gone so far as permitting, in the face of opposition, an amendment which would introduce into a writ a cause of action which simply did not exist at the date of the issue of the writ.”

54.  According to such dicta, the Eshelby rule can be disapplied under certain circumstances.

55.  The Court of Appeal also had a further opportunity to consider the Eshelby rule in Chan Mei Lin v Lee Hong^[21].  Though the Eshelby point was eventually not pursued in the oral hearing (but only included in written submissions), Chu JA, giving reasons for the court together with Lam VP and Poon JA (as he then was) sitting, said at §28:

“At the hearing before us, Mr Chong, correctly in our view, did not seek to advance this argument. We would additionally observe that the court’s discretion under Order 20 rule 5(1) is a wide one. The decision in Eshelby does not create an inflexible rule and the case has to be considered together with the discussions in subsequent decisions of the English Court of Appeal: see, for example, Vax Appliances Limited v. Hoover Plc [1990] RPC 656 at 661, and Hendry v. Chartsearch Ltd [1998] EWCA Civ 1276, at §§19-23; see also the discussions in Wing Siu Co Ltd v. Goldquest International Ltd [2003] 2 HKC 64 at §§9-18.”

56.  In making the dicta, Chu JA has also referred to the provisions in O 18 r 9.^[22]

57.  I accept that the more flexible approach in Chan Mei Lin, which is consistent with the English decisions, represents the current law.  Hence, the Eshelby rule is only one aspect of the court’s wide discretion under O 18 r 9 or O 20 r 5 as to whether to allow the amendment.  This is also supported by the commentary in Hong Kong Civil Court Practice 2019 which reads:^[23]

“Although the previous Hong Kong authorities have not been expressly overruled, the current law in Hong Kong as of early 2016 would seem to be as expressed in Chan Mei Lin (above). If that is correct, the traditional view expressed in Eshelby (above) should certainly not be relied on as absolute, but perhaps only as a matter of discretion.”

58.  The Defendants submit that the case of Chan Mei Lin is of limited assistance.  First, it is pointed out that the dicta of the court are only obiter, as it was not an issue raised in the appeal and the court did not have the benefit of the arguments advanced by the parties.  Second, the defendant in Chan Mei Lin was only seeking to introduce further acts of a continuous breach of licence and trespass to land which had already been pleaded in his counterclaim. Third, in Telecommunications & Technology Asia (BVI) Limited v Outblaze Limited[24], Recorder A Chow SC (as he then was) had also considered the various English authorities, but held that it was bound to follow the Hong Kong approach in light of the Court of Appeal’s judgment in Wing Siu.  Hence, the Defendants argue that the more restrictive approach in Wong Siu remains good law.

59.  I disagree.  Firstly, the Eshelby point had been covered by the parties in their written submissions in Chan Mei Lin and so the Court of Appeal’s dicta were made with the benefit of legal arguments.  Further, the Court of Appeal ultimately allowed the appeal and restored the amendment which was said to contain a post-writ cause of action.  It must mean that the Eshelby rule created no difficulty.  On the other hand, the case before Recorder Chow in Telecommunications & Technology Asia (BVI) Limited was one where a party sought to make an amendment to cure a defective claim by the addition of a plea of a necessary factual averment that could not be pleaded as at the date of the writ.[25]  It is certainly not the case here.

60.  For the sake of completeness, I would also mention the latest decision on the Eshelby rule, ie. Tao, Soh Ngun v HSBC Int’l Trustee Ltd^[26].  However, such authority is of limited assistance as only Wing Siu was cited to W Chan J, but the later Court of Appeal’s decision in Chan Mei Ling was not.  As such, the learned judge considered himself bound by Wing Siu without considering Chan Mei Lin.

61.  In fact, there are many reasons to favour the more flexible approach as laid down in Chan Mei Lin. First, it should have been the legislative intent of the new O 18 r 9 to give more flexibility to the court to deal with post-writ matters in pleadings.  The express wording in the rule allows a party to “plead any matter, whether before or since the issue of the writ”.  Second, the modern approach to litigation emphasises case management and efficient disposal of cases.  If there is no prejudice to the counter-party such as depriving him of defence like limitation, provided that there is close connection between the original claim and the post-writ claim, there is no reason why the court should insist the party to commence a new cause of action to deal with the post-writ claim.

62.  In the present case, the new claims are inextricably linked with the original claims in the writ, and all of them involve exactly the same parties.  As confirmed by Mr Man, the new claims are defensive in nature and are not stand-alone claims.  In the event that the original claims fail, the new claims also cannot succeed.  Under such circumstances, it would only be sensible for the new claims to be tried together in the original action, rather than for such “dependent claims” to be tried in a separate action.

63.  Furthermore, the new claims are necessitated by the subsequent events which are quite beyond the control of the Plaintiff.  Neither could the Plaintiff have anticipated such new claims at the time of the commencement of the 2018 Action.

64.  In any event, the Amendments do not fall foul of the Eshelby rule even on more restrictive approach as laid down in Wong Siu.

65.  First, the additional breaches are not pleaded as new claims per se.  They are primarily pleaded to respond to the plea of lack of causation against the original claims, defensive in nature, and consequential to the amendments in the Amended Defence. They supply further reasons for the arguable original claim for the 20% interest in the Target. They are therefore “amendments which allow the real dispute in the case to be determined”, rather than “one which introduces into the action a cause of action which could be said to be incurably bad” which is not allowed according to Rogers VP in Wong Siu.[27]

66.  Second, the Plaintiff is putting forward these new claims to deal with the issue of the relief to be granted in the original claims and the “break of causation” defence put forward by the Defendants, which to a great extent is also related to damages.  In other words, the court needs to look at the subsequent events and the new claims to determine the relief to be granted in the original claims.  According to the dicta of Mummery J in Vax Appliances Ltd v Hoover Plc^[28], which were approved by Rogers VIP in Wong Siu[29], it may be convenient to allow the introduction of the new claims because the same arguments may affect the remedy which would be granted in the original action.

67.  For the above reasons, I do not accept that the Eshelby rule is a ground to deny the Amendments.   

(ii)   Specific objections raised by the Son’s Group

68.  Mr Chan, SC, counsel for the Son’s Group, has also raised some specific objections to the Amendments on the ground that the Plaintiff’s new claims are bound to fail and should not be allowed.

69.  First, he submits that it is internally incoherent and untenable for the Plaintiff to claim that the Defendants had frustrated the object of the Joint Venture by causing Jeneration to issue the Termination Notice.  On the Plaintiff’s own case, the parties ceased to collaborate in accordance with the Joint Venture in December 2017, when the Defendants made a decision to independently bid for the Target.  If this is correct, the Joint Venture was frustrated long before Jeneration issued the Termination Notice in March 2019.  As the Plaintiff itself acknowledges, by that stage the relationship of the two sides had broken down and the Defendants had decided to pursue the acquisition of the Target on their own.  Hence, even if Jeneration subsequently completed its own independent bid to acquire the Target, that would not have resulted in any benefit to the Plaintiff or the alleged Joint Venture.

70.  Likewise, it is wholly inconsistent for the Plaintiff to suggest that the Defendants had wrongfully disposed of any right or property acquired pursuant to the Agreement.  As the Plaintiff’s own case is that Jeneration’s independent bid to acquire the Target was in breach of the Agreement, it is contradictory for the Plaintiff to now turn around and claim that Jeneration’s bid to acquire the Target was something which was done pursuant to the Agreement.

71.  In my judgment, whether the Plaintiff’s new claims are consistent with the original claims depends on how the Plaintiff is formulating the claims in the pleading.  If the Plaintiff is claiming that the Agreement continued to exist after the original breach, say there was no acceptance of the repudiation, it is open to the Plaintiff to argue that there were further subsequent breaches of the Agreement.  At this stage, it suffices for me to say that the Plaintiff’s new claims are arguable.  If the Plaintiff decided not to accept the repudiation on the part of the Kingsley Parties in proceeding to bid for the Target alone, the Plaintiff is still able to claim for further breaches of the Agreement based on subsequent events which occurred after the original breach.  The same applies to the claim for subsequent breaches of fiduciary duties, as the fiduciary relationship might continue to exist after the original breach.

72.  Mr Chan has also advanced some other arguments to attack the new claims:

(i)  The court will not order specific performance where the performance is impossible, even if this is the Defendants’ fault.  In such scenario, the Plaintiff is limited to its right to claim compensatory damages for contractual breach, and there is no right for the Plaintiff to seek damages or compensation for the loss of its ability to claim for specific performance.[30]

(ii)  The law does not countenance attempts to prohibit businessmen from walking away from a commercial deal, and any term purporting to create an obligation to use “reasonable endeavours” or “reasonable care” to ensure the completion of a commercial deal is invalid. ^[31]  So on the Plaintiff’s own facts, the parties could not have entered into a binding agreement to use reasonable care to ensure the completion of the acquisition even if they wanted to.

(iii)  There is no room for the court to imply the alleged new implied terms in the Agreement, as the same would fail the officious bystander test.

(iv)  The second condition for the application of the Pallent v Morgan principle is not present in the instant case, because the Defendants have never acquired the property in issue, i.e. the Target.  By the same token, the Plaintiff cannot maintain the claim for constructive trust based on the alleged failure to preserve the trust property.

(v)  The Plaintiff cannot claim that the Defendants held the contractual right to acquire the Target under the SSA on trust for the Plaintiff because: (a) it is not the Plaintiff’s pleaded case; and (b) a trust cannot be imposed in respect of such contractual rights as the same is prohibited by clause 18.3 of the SSA[32].

73.  In my judgment, it is not necessary for me to resolve all these issues at the interlocutory stage.  It suffices for me to say that, for the purpose of the Amendment Application, the Plaintiff’s new claims are not bound to fail.

74.  Based on the facts alleged by the Plaintiff, it is at least arguable for the Plaintiff to claim that, because of the alleged wrongful conducts of the Defendants leading to the termination of the SSA in March 2019, the Plaintiff is entitled to claim for the loss of the 20% interest in the Target as damages even in the 2018 Action.  One has to bear in mind that the new claims are not stand-alone claims.  The new claims would affect the remedy to be granted in the original action, and I see no inconsistency in the claims themselves.

75.  Further, if one is to focus on the relief to be granted in the original claims, which may depend on events which occurred after the issue of the Writ, then whether there was a subsequent breach of Pallent v Morgan duty would only be relevant in assessing the damages of the original claims.  It is at least arguable that the Defendants owed fiduciary duties to the Plaintiff to bid for the Target, and if they failed in such duties, they have to account to the Plaintiff for its loss.

76.  Finally, there is nothing new for the court to imply an obligation on a contracting party to use best endeavours to complete a task which is crucial to the object of the contract, or that a duty is imposed upon a fiduciary to act in the best interests of his principal if the circumstances so warrant.  The question of whether the court would imply a particular term or obligation in a contract is a fact-sensitive issue and so the court cannot resolve these matters at the interlocutory stage.

77.  Hence, despite the able submissions of Mr Chan, I reject the specific objections raised by the Son’s Group that the Plaintiff’s new claims against them are bound to fail.

(iii)    Specific objections raised by the Father’s Group

78.  Ms Chan, SC (as she then was), counsel for the Father’s Group, has also raised a number of specific arguments with reference to her clients.

79.  It has all along been the case of the Father’s Group that it was the Son and his group of companies which made the Agreement with the Plaintiff, and the Father’s Group had nothing to do with the Joint Venture.  The Amendments refer to subsequent events such as the issuance and service of the Termination Notice, and it is also alleged the Defendants failed to used reasonable endeavours to satisfy the Regulatory Conditions before the Long Stop Date.  However, all these had nothing to do with the Father’s Group.

80.  Ms Chan submits that it was the Son, the 3rd and 4th Defendants which incorporated Jeneration.  There is no suggestion that the Father’s Group were in control of or involved in the management of Jeneration. She also relies on the terms in the SSA, the Termination Notice and the draft Term Sheet to show that the Father Group were not involved in the bid or the issuance of the Termination Notice.  She also points out that the evidence produced by the Plaintiff about the approval or ratification of the Agreement by the Father’s Group is tenuous.

81.  According to Ms Chan, the Plaintiff has not been able to identify any material fact in support of the relationship between the Father’s Group and the Plaintiff which would give rise to the alleged fiduciary duties or duty of care.

82.  Based on these basic contentions, Ms Chan has developed the “corporate veil”, “no privity” and “no duties” arguments. Further, in light of the Plaintiff’s admission that the pursuit of the 2018 Action had adverse impact on Jeneration’s ability to comply with the Regulatory Conditions and the lack of supporting evidence, the Plaintiff would not be able to establish the causal link between the lapse of the SSA and the alleged breach of duties of reasonable endeavours to procure compliance with such Conditions.  This is, in substance, the “lack of causation” argument.

83.  In support of their contentions, the Father’s Group seek to rely on 4 affirmations filed on behalf of the Father and the 7th Defendant in support of the Striking Out Application (“the 4 Affirmations”), which is opposed by Mr Man.

84.  Mr Man’s objection has merit.  On 28 June 2019, I gave directions for the filing of evidence for the Amendment Application. None of the Defendants have filed any evidence in opposition before the deadline on 26 July 2019.  On 29 July 2019, the Plaintiff’s solicitors wrote to all the Defendants’ solicitors stating that the Amendment Application would proceed on the basis that the Defendants would not rely on any evidence in the substantive hearing of the Amendment Application.  On 7 August 2019, the Plaintiff’s solicitors requested the Defendants to indicate which part of the Amendments would be opposed and the precise grounds of objection.  For the solicitors acting for the Father’s Group, they only replied that the Amendments were “demurrable” without giving further details.  It was only on 20 August 2019 that the solicitors for the Father’s Group indicated that they would seek to include in the hearing bundle the Plaintiff’s affirmation for leave to serve the writ outside jurisdiction and the 4 Affirmations.

85.  I agree with Mr Man that this is not how modern litigation should be conducted.  It is one thing that the Plaintiff bears the burden to justify its application, it is quite another for the opposing party to refuse, despite requests, to give advance notice of even its broad grounds of opposition.  Further, the 4 Affirmations were not filed for the purpose of the Amendment Application.  If the court were to allow them to rely on these affirmations, it would undermine the timetable imposed by the court for the filing of affirmations in opposition and the order that no further evidence shall be filed without the leave of the court.  The Plaintiff would also be deprived of the opportunity to file evidence in reply.  Under such circumstances, the Father’s Group should not be allowed to rely on the 4 Affirmations to oppose the Amendment Application.

86.  Even if they were permitted to rely on the 4 Affirmations, the result would be the same.  Bearing in mind the lateness of the notification and that the Plaintiff had no opportunity to file evidence in reply, the Plaintiff should be taken as disputing the factual allegations made by the Father’s Group in the 4 Affirmations.  As this is only an amendment application, it is trite law that the court should not engaged in a prolonged investigation about the merits of the claim.  So far as the pleading is concerned, the Plaintiff has pleaded the case of agency and ratification against the Father’s Group.  There are also triable issues on matters such as the contents of the meeting between Mr Wang of the Plaintiff and the Father in a restaurant on or about 11 December 2017 and the role of the Father in the whole transaction.  If the Father’s Group were not involved in the transaction, it calls for an explanation as to why the 5^th and 6^th Defendants signed on the 1^st and 2^nd Framework Agreements respectively.  Whether the evidence in support of the new claims is sufficient is a highly fact-sensitive matter, and the court cannot and should not resolve the factual disputes at this stage.  Hence in my judgment, the Plaintiff has at least an arguable case against the Father’s Group on the new claims.

87.  Ms Chan also submits that, if the court were to allow the Amendments, it would deprive the right of the Father’s Group, with some them being residents outside jurisdiction, to challenge the jurisdiction of the court over the new claims under O 11 r 1(1) of the RHC.  According to Ms Chan, this would be a serious prejudice to the Father’s Group.

88.  Despite Ms Chan’s able submissions, one must bear in mind that: (i) the court has jurisdiction to deal with the original claims against each of the Defendants in the Father’s Group in the 2018 Action; and (ii) by dismissing the Striking Out Application by the Father and the 7^th Defendant, the court has ruled that the Plaintiff has arguable claims against them in the 2018 Action.  On such basis, i.e. the Plaintiff has arguable claims against the Father’s Group for breach of contract, breach of fiduciary duty and knowing receipt, it must follow that the Plaintiff would have at least an arguable case against the Father’s Group for the new claims, taking into account that the new claims are not stand-alone claims but would only affect the remedy and the “lack of causation” defence which has been raised in the 2018 Action.  In any event, if the Father’s Group were of the view that the Plaintiff does not have an arguable case against them for the new claims, it is always open to them to make a striking out application in the 2018 Action.  Hence, the prejudice complained by Ms Chan is more apparent than real.

89.  For the above reasons and based on the existing materials before me, I am unable to conclude that the new claims of the Plaintiff against the Father’s Group are bound to fail, and the Amendments should not therefore be denied on such basis.

CONSOLIDATION APPLICATIONS

90.  In view of the aforesaid ruling, it is quite unnecessary for me to consider the Consolidation Applications and whether the consolidation summons in the 2019 Action has been properly served on the Father and the 5^th and 7^th Defendants which are overseas Defendants.  However, the 2019 Action should not be allowed to proceed because the new claims have already been included in the 2018 Action.  I therefore make an order to stay the 2019 Action.

91.  For the above reasons, I allow the Amendments and stay the 2019 Action.

92.  I also make the following costs order nisi:

(i)  save that the Defendants do pay to the Plaintiff for the costs incurred after 8 July 2019 (i.e. 14 days after the date of the Amendment Application), the costs of the Amendment Application be costs in the cause; and

(ii)  the costs of the Consolidation Applications and the 2019 Action be reserved to be determined after the adjudication of the case in the 2018 Action.

93.   The order nisi shall be made absolute 14 days after the date of the handing down of this Decision.