NEW ASIA ENERGY LTD. v. CONCORD OIL (HONG KONG) LTD.

CACV 347/98

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 347 OF 1998

(ON APPEAL FROM HCA NO. 21610 OF 1998)

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J U D G M E N T

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Keith J.A. (giving the first judgment at the invitation of Godfrey J.A.):

Introduction

1. The Defendant, Concord Oil (Hong Kong) Ltd. ("Concord"), owns a barge from which marine diesel fuel and oil is sold. By an agreement dated 1st June 1996, Concord granted an exclusive licence to the Plaintiff, New Asia Energy Ltd. ("New Asia"), to operate the barge and use it for selling fuel and oil to vessels in Hong Kong waters. The term of the licence was for three years, and the agreement contained provisions for the licence's renewal or termination. The agreement replaced a less formal arrangement for the licence of the barge to New Asia which had previously been in place.

2. On 15th December 1998, a number of persons boarded the barge. They had been instructed by Concord to do so. They claimed to be recovering possession of the barge. After a while, they disembarked, but not before steps had been taken to tow the barge away. They threatened to return. Fearing that a second attempt would be made by Concord to repossess the barge, New Asia applied ex parte on the following day for an injunction to restrain Concord from repossessing the barge. Suffiad J. granted New Asia an injunction preventing Concord, until after the hearing of an inter partes summons returnable the following week, from

(a) boarding, towing away or coming into physical possession with the barge, or

(b) interfering with any voyage of the barge or New Asia's use and enjoyment of the barge.

3. Suffiad J. also gave Concord liberty to apply for the discharge of this injunction on 48 hours' notice. In the event, Concord applied to Pang J. on 19th December for the injunction to be discharged. Pang J. found that New Asia had withheld material facts from Suffiad J., and he discharged the injunction on that ground. He also ordered New Asia to pay Concord's costs of the application to discharge the injunction on an indemnity basis. New Asia now appeals against those orders.

The academic nature of the appeal

4. It is common ground that the appeal is now academic save as to the costs of the proceedings for interlocutory relief. That is because, despite the discharge of the injunction, New Asia continued to operate the barge. New Asia only returned it to Concord at the end of May 1999 when the licence expired. It would not therefore be appropriate for the court to reinstate the injunction granted by Suffiad J., and Mr. Clive Grossman S.C. for New Asia did not ask us to do so. Indeed, we were told that, but for the issue of costs, the action has now been settled.

5. These facts prompted Mr. Nigel Aiken S.C. for Concord to make a bold submission. Since the appeal is a live one only because the costs of the interlocutory proceedings before Suffiad J. and Pang J. turn on it, Mr. Aiken contended that the appeal was incompetent since leave to appeal had not been obtained. New Asia required leave to appeal, so it was said, because section 14(3)(e) of the High Court Ordinance (Cap. 4) requires leave to appeal from an order "relating only to costs". This submission is fallacious. The principal order appealed from was the order discharging the injunction. True, the only impact which a successful appeal from that order would have would be on the costs of the interlocutory proceedings, but that does not mean that the order appealed from related only to costs.

The evidence before Suffiad J.

6. New Asia's evidence before Suffiad J. explained the context in which Concord's attempt to repossess the barge had occurred. The annual fee for the licence to operate the barge was payable by New Asia under the agreement by quarterly instalments in advance. The agreement permitted Concord to terminate New Asia's licence if it failed to pay the licence fee as required under the agreement. On the day before the attempt to repossess the barge, Concord had purported to terminate the licence on the ground that the instalments of the licence fee due on 1st September 1998 and 1st December 1998 had not been paid.

7. However, New Asia's evidence before Suffiad J. also explained why any attempt by Concord to justify its repossession of the barge on this basis would be misconceived. Although the licence fee was expressed in the agreement to be payable in advance by quarterly instalments, the fee had always been paid in arrears, and only when debit notes had been issued by Concord. That was because the agreement had also provided for the giving of a rebate by Concord to New Asia in respect of the purchase by New Asia of fuel and oil from Concord. Since the rebate could be set off against the licence fee, the rebate needed to be calculated before the net licence fee payable to Concord could be ascertained.

8. Thus, New Asia's case before Suffiad J. was that it was at the very least arguable that the purported termination by Concord of the licence was of no effect, because there had been no breach by New Asia of the provisions in the agreement about payment of the licence fee. Either the provisions had been varied to permit payment against debit notes, or the breach by New Asia of these provisions had been waived. In support of this argument, evidence was placed before Suffiad J. relating to previous proceedings between the parties over whether on earlier occasions New Asia had been in breach of these provisions.

The allegation of material non-disclosure

9. Against that background, I turn to the allegation that New Asia had failed to disclose material facts to Suffiad J. The law is well established, but it is sensible to remind oneself of those principles which are relevant to the issues raised in the present appeal. I take them from Gee, "Mareva Injunctions and Anton Piller Relief", 4th. ed., pp.128 and 131:

"The duty extends to placing before the court all matters which are relevant to the court's assessment of the application, and it is no answer to a complaint of non-disclosure that if the relevant matters had been placed before the court, the decision would have been the same. The test as to materiality is an objective one, and it is not for the applicant or his advisers to decide the question; hence it is no excuse for the applicant subsequently to say that he was genuine unaware, or did not believe, that the facts were relevant or important. All matters which are relevant to the 'weighing operation' that the court has to make in deciding whether or not to grant the order must be disclosed ....

The plaintiff must also identify any defences, which, although not yet taken, would have been available to be taken by the defendant had he been present at the application, provided that:

(1) the defence is one which can reasonably be expected to be raised in due course by the defendant;

(2) the defence is not one which can be dismissed as without substance or importance ...."

Although these observations were made in the context of ex parte applications for Mareva injunctions and Anton Piller orders, they apply to all ex parte applications, and in my view they represent the current state of the law both in England and in Hong Kong. To take two local cases as examples, in Citibank N.A. v. Express Ship Management Services Ltd. [1987] HKLR 1184, Fuad J.A. (as he then was) said at p.1190C-E:

"The cases show what are to be regarded as material facts in this context: 'all facts that are relevant to the weighing operation which the court has to make in deciding whether or not to grant the order': per Browne-Wilkinson, J. (as he then was) in Thermax v. Schott Industrial Glass [1981] FSR 289, 298. His test has been applied in several cases. I find the decision of Goulding, J. in Wardle Fabrics Ltd. v. G. Myristis Ltd. [1984] FSR 263 to be particularly helpful for in that case the judge emphasized that the correct test is not simply whether, if the non-disclosure had not occurred, the ex parte judge would, nevertheless, have made the order, but whether the facts not disclosed, being relevant, should have been in the scales."

And in Fenn Kar Bak Lily v. Goh Kim Lay [1995] 3 HKC 313, Mortimer J.A. (as he then was) said at p.317B-C:

"... the plaintiff must put before the judge the grounds for his claim, the amount of the claim and any obvious matters of fact or law which could be raised by the defendant against the making of an order."

Pang J. found that two material facts had been withheld from Suffiad J., and I must deal with each in turn.

(i) New Asia's sale of fuel and oil other than that supplied by Concord. The evidence filed by Concord for the hearing before Pang J. included Concord's response to New Asia's allegations about the payment of the licence fee. It was accepted that New Asia had originally been permitted to pay the instalments of the licence fee in arrears against receipt of debit notes once the rebate had been calculated. However, it was said that that practice had stopped some time previously when New Asia had stopped purchasing fuel and oil from Concord. Since New Asia was no longer entitled to rebate, there was no reason why New Asia should not have returned to paying the instalments of the licence fee in advance as the agreement had required.

10. The relevance of that for present purposes lies in the assertion that New Asia had stopped purchasing fuel and oil from Concord. If New Asia was not getting from Concord the fuel and oil which it was selling, it must have been getting the fuel and oil from other sources. However, in cl. 14(vi) of the agreement, New Asia had expressly undertaken not to sell or otherwise deal with fuel and oil not supplied by Concord. Thus, what Concord alleged, and what Pang J. found, is that New Asia's undertaking in cl. 14(vi) of the agreement, and its breach of that undertaking, were not drawn to Suffiad J.'s attention. Had he known that, it is said that he would have realised that

(a) the termination by Concord of the licence was justified because cl. 6(2) of the agreement gave Concord the right to terminate the agreement in the event of a breach of, inter alia, cl. 14, and

(b) Concord's attempt to recover possession of the barge was also justified because cl. 15(a) of the agreement imposed on New Asia the duty to give up possession of the barge if the licence was terminated "for any reason".

11. Mr. Grossman reminded us that New Asia's alleged breach of cl. 14(vi) had never been given as a ground for terminating the licence by the time the application was made to Suffiad J. That may be so, but if it could reasonably have been expected that Concord would in due course argue that New Asia had been in breach of cl. 14(vi), it was incumbent on New Asia to draw that fact to Suffiad J.'s attention.

12. New Asia's stance on the allegation that it was in breach of cl. 14(vi) emerges from its Defence in other proceedings brought against it by Concord (in which a claim was made for damages for breach of cl. 14(vi)). However, it has to be said that that stance is not entirely clear. Mr. Grossman conceded as much. New Asia was either saying that from September 1997 Concord refused to sell fuel and oil to it at all. Alternatively, it was saying that it was only obliged to buy fuel and oil from Concord if fuel and oil were offered on competitive terms. Since September 1997, they had not been offered on competitive terms. In either event, New Asia was contending that it was entitled to buy fuel and oil from other sources.

13. The fact remains, however, that at the time of the hearing before Suffiad J. New Asia knew that it had not in fact purchased fuel and oil from Concord since September 1997, and that it had purchased fuel and oil from other sources. Only time would tell whether Concord would in fact contend that that amounted to a breach of cl. 14(vi), but the very real possibility that it might do so could not have been discounted. Indeed, putting myself into the shoes of the directors of New Asia at the time of the application to Suffiad J., I would have assessed the chances of Concord contending in the future that New Asia had been in breach of cl. 14(vi) as very likely. In my view, there was, therefore, a duty on New Asia to draw that fact to the attention of Suffiad J., so that he could give it such weight as he thought appropriate in the balancing exercise which he had to carry out.

14. Mr. Grossman contended that that would have been to place too great a burden on New Asia. In the earlier proceedings, Concord had claimed to be entitled to the return of the barge in the light of New Asia's breach of the agreement, but the only breach relied on related to the failure to pay the instalments of the licence fee in advance. If Concord had not then claimed to be entitled to the return of the barge because of a breach by New Asia of cl. 14(vi) of the agreement, why should Concord have reasonably been expected to allege a breach of cl. 14(vi) subsequently? I see the force of that argument, but I am not persuaded by it. Matters had moved on since the earlier proceedings had been commenced. Concord had attempted to repossess the barge. If there were to be proceedings over the legality of that attempted repossession, Concord could reasonably have been expected to take every point open to it. The breach of cl. 14(vi) was an obvious point for it to take. It may be that it was arguable that Concord's failure to take the point in the past amounted to a waiver of earlier breaches of cl. 14(vi) or constituted an estoppel by which Concord would be prevented from relying on such breaches, but the arguability of that was for Suffiad J. to assess in the balancing exercise which he had to conduct.

15. I should add that I have little doubt that if Suffiad J. had been told that Concord might seek to justify the termination of the licence on the ground that New Asia had been in breach of cl. 14(vi), and if he had also been told what New Asia's response to that allegation would have been, he would still have granted the relief sought. But to repeat what was said in the Citibank case: it is no answer to a complaint of non-disclosure that, if the relevant matters had been placed before the court, the decision would have been the same.

16. I return to the judgment of Pang J. He said that New Asia had actually been in breach of cl. 14(vi). That is not a finding which Pang J. should have made, because at that stage all he had to go on was what Concord had said on the topic. New Asia had not yet got round to answering the allegation that it had been in breach of cl. 14(vi). However, for the reasons I have given, there was nevertheless non-disclosure to Suffiad J. of material facts, not on the basis that New Asia had in fact been in breach of cl. 14(vi), but on the basis that it could reasonably have been expected that Concord would in due course allege that New Asia had been in breach of cl. 14(vi).

(ii) New Asia's finances. No evidence was placed before Suffiad J. as to New Asia's financial standing. By the time of the hearing before Pang J., Concord had obtained a copy of New Asia's annual return. That showed that although it had an authorised share capital of $100,000.00, only two $1.00 shares had been issued. Pang J. concluded that this fact had been highly relevant to whether the cross-undertaking as to damages which New Asia gave was worth anything, and he held that New Asia's failure to draw this fact to Suffiad J.'s attention also amounted to material non-disclosure.

17. In Manor Electronics Ltd. v. Dickson [1988] RPC 618, Scott J. (as he then was) said that if a plaintiff has financial difficulties affecting its ability to honour its cross-undertaking as to damages, that is a material fact which ought to be disclosed to the ex parte judge. If a plaintiff does not refer to his financial standing, it is assumed by the ex parte judge that it is adequate to support the cross-undertaking as to damages, as the ex parte judge depends upon the plaintiff making full and frank disclosure. If there has been such material non-disclosure, the court ought to discharge the ex parte order without going into the merits. I agree with all that.

18. However, the material facts which ought to have been disclosed were not so much whether New Asia was what the judge described as a "two dollar" company, but rather what its assets were or whether it had other financial sources from which it could have honoured any order for damages made pursuant to the cross-undertaking as to damages. I am not convinced, therefore, that the failure to disclose the fact that only two $1.00 shares had been issued was a material fact. What may have been much more material for New Asia to disclose was that such assets as it had were subject to bank guarantees (even though that is an extremely common commercial occurrence). However, I do not propose to address that issue (which was not before Pang J. because he had no evidence as to what New Asia's assets were or what its financial standing was), because having concluded that the non-disclosure of the possible breach by New Asia of cl. 14(vi) justified the discharge of the injunction, it is unnecessary for me to do so.

Conclusion

19. For these reasons, I would dismiss the appeal from Pang J.'s order discharging the injunction granted by Suffiad J. I would add, though, that I have grave doubts as to whether this was a case for an injunction at all. I have not overlooked Mr. Grossman's point that Concord attempted to deprive New Asia of possession of the barge by force, but at present I do not see why, in view of the evidence placed before Pang J. about Concord's assets, damages would not have been an adequate remedy for New Asia if it had been found at trial that Concord's attempt to repossess the barge had been unlawful. True, it would have taken a little effort to calculate what New Asia's losses would have been, but the profits which it had made from the sale of fuel and oil from the barge in the previous few years would have been a reliable guide.

Indemnity costs

20. I turn finally to whether the order for costs which Pang J. inevitably made in favour of Concord should have been on an indemnity basis. He gave no reasons for doing so, but he presumably thought that New Asia's failure to disclose material facts to Suffiad J. justified indemnity costs.

21. Three principles are relevant here. All of them were set out with clarity by Godfrey J.A. in Sung Foo Kee Ltd. v. Pak Lik Co. [1996] 3 HKC 570. First, at p.573G-H, it was said:

"This court would be very reluctant to interfere with the exercise of his discretion by a judge who for some good reason thought it appropriate to order a taxation of costs to proceed on one basis rather than another, even if it would itself have taken a view different from that of the judge: see Lakhan v. Wu Wing Tat & Anor [1987] 3 HKC 54 ..."

Secondly, at p.575C-E, it was said that the discretion to award indemnity costs is not

".... limited by indications in previous cases, such as, eg the observations of Godfrey J. in Overseas Trust Bank Ltd. v. Coopers & Lybrand [1991] 1 HKLR 177 (in which he declined to order the successful party's costs to be taxed on the indemnity basis), as to the sort of special or unusual feature (there does have to be some special or unusual feature) which could justify an award of indemnity costs. Although the examples given in the judgment of Godfrey J. at 182J-183C may be of assistance in other cases in which indemnity costs are claimed, his judgment does not purport to be and is not to be taken as determinative of the sort of case in which indemnity costs may be ordered."

Thirdly, Godfrey J.A. reviewed a number of cases in England and endorsed the observations made in them. Thus, the court rejected the argument that indemnity costs would only be appropriate where there had been deception or underhand conduct or should be confined to cases which had been brought with an ulterior motive or for an improper purpose. The court referred to what Millett J. (as he then was) had said in MacMillan Inc. v. Bishopgate Investments Trust Ltd., 10th December 1993, (unreported):

"Litigants who conduct their cases in bad faith, or as a personal vendetta, or in an improper or oppressive manner, or who cause costs to be incurred irrationally or out of all proportion as to what is at stake, may also expect to be ordered to pay costs on an indemnity basis if they lose, and have part of their costs disallowed if they win. Nor are these necessarily the only situations where the jurisdiction may be exercised; the discretion is not to be fettered or circumscribed beyond the requirement that taxation on an indemnity basis must be 'appropriate'."

22. Having said all that, I do not see how the mere failure to disclose material facts on an ex parte application can of itself automatically justify the award of indemnity costs. The non-disclosure may simply be an innocent oversight, not intended to gain an unfair advantage in any way. On the other hand, Pang J. said that New Asia had "withheld" material information from Suffiad J. I read that as a finding that New Asia had done something more than merely fail to disclose material facts. By describing New Asia as having "withheld" material facts, the judge was saying that there was at least an element of deliberation about their conduct. Mr. Grossman accepted that it may be appropriate for indemnity costs to be awarded on an application to discharge an injunction granted following the deliberate withholding of material facts from the court. Accordingly, the real question is whether it was reasonably open to Pang J. on the evidence before him to conclude that there had been an element of deliberation about New Asia's failure to disclose material facts.

23. There are two comments I wish to make about that. First, it is necessary to distinguish between the withholding of facts which are believed to be material, and the withholding of facts which are believed (albeit erroneously) not to be material. Both may be deliberate, but the former is obviously more serious than the latter. It is not possible to tell what Pang J. thought. Secondly, Mr. Aiken fairly accepted that he could not point to any particular piece of evidence which would support the conclusion that there had been an element of deliberation about New Asia's failure to disclose material facts. I agree. I have not seen anything which suggests something other than that, in the rush to obtain an order to prevent any further attempt to repossess the barge, facts which should have been brought to Suffiad J.'s attention were overlooked.

24. In the circumstances, and although the exercise of the judge's discretion on the topic is not to be interfered with lightly, I have formed the view that it was not reasonably open to the judge to conclude that it was appropriate to make an order for indemnity costs in a case such as this. I would therefore allow the appeal to the limited extent of setting aside the order made by the judge for costs on an indemnity basis, and I would direct that Concord's costs below be taxed on the usual basis.

The costs of the appeal

25. Although New Asia has been successful on the issue of indemnity costs, Concord has succeeded on the principal issue raised in the appeal, namely whether Pang J. was right to discharge the injunction. In the circumstances, the order nisi which I would make as to the costs of the appeal is that New Asia should pay to Concord half of Concord's costs of the appeal, to be taxed if not agreed.

Ribeiro J.:

26. I respectfully agree in full with the judgment delivered by Keith J.A. and have nothing to add.

Godfrey J.A.:

27. I regret that I am unable to agree with the conclusions of Keith, J.A. on the "clause 14(vi)" point. Although I accept with gratitude his statement of the relevant principles, I have the misfortune to differ from him, so far as the clause 14(vi) point is concerned, as to the application of those principles to the facts of this case.

28. In considering whether or not to grant an application for relief ex parte in a case like this, the court's primary consideration is the need, on grounds of public policy, for parties to resolve their disputes by peaceful means. This dictates that the status quo be preserved, if necessary, by the grant of an interim injunction for the purpose, to continue until after both sides have had an opportunity to be heard. The status quo (to throw in a little more Latin) is the status quo ante bellum. The only "war" here was a dispute between the parties over payment of the licence fee. The clause 14(vi) point had never been raised by the respondent and the appellant had no reason to believe that it ever would be raised: it was simply not in issue. In these circumstances, the clause 14(vi) point was not, as it seems to me, a matter which it would have been material for the judge to consider on the appellant's application for interim relief and the appellant was in no way in breach of its duty to the court in failing to raise it.

29. As to the "$2 company" point, I am of the opinion that this is a bad point. What matters is the financial state of the applicant, not its capitalisation.

30. I would therefore have allowed this appeal. But since Keith, J.A. and Ribeiro J. are of a contrary opinion, it will be dismissed and the orders we make will be as proposed by Keith, J.A.