CHU CHUNG MING AND ANOTHER v. LAM WAI DAN AND OTHERS

HCCW 377/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO 377 OF 2011

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D E C I S I O N

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1.  The respondents seek to adduce as evidence parts of a letter read out during mediation of another case. The question is whether or not exceptions to principles governing confidentiality or without prejudice communications apply.

Background

2.  The petitioners are husband and wife and so are the respondents.  The 1^st respondent is the elder brother of the 2^nd petitioner.  All 4 of them are equal shareholders and directors of the 3^rd respondent (“the Company”).

3.  The 1^st petitioner and 1^st respondent used to run a partnership in construction sub-contracting.  In 1994, they incorporated Sun Shing Construction Co Ltd (“Sun Shing”), which took over the partnership.

4.  As the business of Sun Shing flourished, the Company was established as the property arm to hold properties purchased with Sun Shing’s profits. 

5.  The relationship of the petitioners and respondents turned sour in about 2009.  The 1^st petitioner took out HCCW 605 of 2009 to wind up Sun Shing (“the Sun Shing case”) on the just and equitable ground.  The 1^st respondent was a party in that case. 

6.  On 8 February 2011, mediation of the Sun Shing case (“the mediation”) was conducted.  There is no dispute that during the mediation, the 1^st respondent read out a letter (“the letter”) that he had given to the 1^st petitioner on the same day.  The opening paragraph and paragraph 4 thereof (“the 1^st passage” and “2^nd passage” respectively) are relevant to this summons.

7.  In March 2011, as a result of the mediation, the 1^st respondent bought out the 1^st petitioner’s interest in Sun Shing as part of the settlement and the 1^st petitioner resigned as its director.

8.  On 15 November 2011, the petitioners took out this petition for the winding up of the Company on the just and equitable ground.  The Company was described as a quasi-partnership among the parties.  The petitioners aver, among others, that the respondents (i) had denied the petitioners access to the Company’s book and records and had excluded them from management,  in particular, stopping the 1^st petitioner from entering the office building on 30 September 2011; (ii) had committed the Company to contracts for fire prevention works without first obtaining the petitioners’ approval.

9.  The respondents denied the allegations and, in their affirmation in opposition, relied on the letter as part of their defence:

(i)  The 1^st passage: the opening paragraph contained this statement: ‘[鑑]於依照[閣]下年多前提議如双方需联絡時，必[須]經双方律師轉達，兩年了… …’.  It allegedly showed that there had been a prior request from the petitioners for inspection of Company documents to be made through solicitors, but the 1^st petitioner failed to abide by it and attended the office without prior notice on 30 September 2011; and

(ii)  The 2^nd passage: paragraph 4 of the letter allegedly showed that the respondents had informed the petitioners of the need to install fire prevention equipment, the consequence of non-compliance and the quotation.

10.  On 30 January 2012, Harris J directed the parties to file points of pleadings.  The defences in the preceding paragraph appear in paragraphs 40 and 44 of the points of defence.

11.  By the present summons, the petitioners seek to strike out the letter as an exhibit and that part of the 1^st respondent’s affirmation referring to it.  He submits that adducing the letter as evidence violates the principles on confidentiality and without prejudice privilege.  In any case, the matters in the 2 passages can be proved by other means, to which the petitioners have no objection.

12.  Mr Yuen, counsel for the respondents, contends that the 2 passages contained no settlement proposal for the Sun Shing case.  It did not contain admissions (or even statements) by the petitioners in the Sun Shing action or the present case.  Nor did it touch on any issue raised in the Sun Shing action.  The respondents were otherwise willing to cover up other parts of the letter before insertion into the trial bundle.

13.  The issues are, therefore, whether any exceptions to the confidentiality and without prejudice principles apply to the 2 passages. 

The applicable principles governing confidentiality in mediation

14.  Fundamental to mediation is confidentiality.  In S v T (Mediation: Privilege) [2011] 1 HKLRD 534, Rogers VP has this to say:

“2.     It suffices for me to say that I consider that the primary document which is sought to be put in is a without prejudice document to the extent that it was a document designed to achieve some sort of a settlement or resolution of the matter. But other documents which are sought to be put in relate to what was said or not said in the course of mediation and I regard this as fundamentally important.

3.       Mediation has now become part of the process which the court approves of to the extent that parties may even be penalised in costs if they are not prepared to embark upon a mediation process. Fundamental to mediation is confidentiality. Every mediation starts with an agreement between the parties and the mediator that what is said in mediation must be kept confidential and even the process of mediation and the fact that it is embarked upon should be kept, in my view, confidential. It is wholly wrong for any party, of their own motion, to refer to what was said or not said or arose out of mediation, unless and until, a concluded agreement has been reached in the mediation which encompasses what may be disclosed and not disclosed.

4.       It is not a simple question of one party waiving privilege because it is a matter for both parties. I regard this as extremely important because it goes to the root of the mediation process which, as I have said, is now part of the court’s process. Unless this is adhered to the whole mediation system will come to naught and people will use mediation as a tactical advantage and then seek to introduce evidence which has come from an unsuccessful mediation and somehow bring that into court proceedings. That is quite contrary to anything which was envisaged in the process of mediation. This applies just as much to matrimonial and custody proceedings as it does to any other proceedings.”

15.  The Court will only compel disclosure of what was said or not said during the mediation if it is necessary for the fair disposal of the case: Farm Assist Ltd (in liquidation) v The Secretary of State for the Environment, Food and Rural Affairs (No. 2) [2009] EWHC 1102 (TCC),at para 21; Confidentiality, Toulson and Phipps, 2^nd ed, para 17-001.

Application of the confidentiality principles

16.  The mediation agreement contained express terms governing confidentiality:

“11. 參與調解的各人︰

(a) 須把進行調解所產生的所有資料以及與調解有關的所有資料保密，包括達成和解的事實和條款，但不包括將會或已進行調解這個事實，或根據法律規定為實行或執行和解條款而須披露資料的情況；以及

(b)    須承諾在調解各方與調解員之間傳遞的所有資料(不論透過任何方式傳遞)不得用以損害任何一方的法定權益，亦不得向任何法官、仲裁員或任何法律程式或其他正式程式中的其他決策人提交這些資料作為證據或披露這些資料，但根據法律規定須披露資料的情況則作別論。”

17.  The letter formed part of the information used in relation to the mediation and was confidential.  The next question is to see whether any exceptions apply.  Mr Yuen submits:

(1) That “save the interest to preserve confidentiality, no other public interest would be implicated by the disclosure of the [disputed evidence]”;

(2) It is doubtful if the confidentiality principles should apply to the 1^st respondent’s own statements;

(3) That without the 2 passages, the respondents will be left with no evidence to rebut the allegations of the petitioners at the trial.

18.  With regard to point (1), once it is shown that a document was part of the information produced for the purpose of the mediation and there was an agreement (or legal principles) to govern its confidentiality, the burden lies on the respondents to prove that there are other public interests overriding the general principles.  It is always a weighing exercise.  Examples are where a settlement reached was procured by economic duress and the parties agreed to waive the confidentiality: Farm Assist Ltd case; or where the public interest in protecting the interests of a child outweighs the public interest in preserving the confidentiality of attempted conciliation: Re D (Minors) (Conciliation : Disclosure of Information) [1993] Fam 231.

19.  Mr Yuen is unable to point to any other public interest that can override the principles governing the confidentiality preserved in the Sun Shing case.

20.  With regard to point (2), during mediation, parties may talk about things which may be a mixture of opening remarks, accusations, admissions, evidence, assessment of merits, expressions of needs, and others.  How can one distill from the discussion to ascertain which remark influenced which party in deciding whether to settle or not?  The principles for maintaining confidentiality in mediation apply to all communications during the mediation, not only to remarks constituting admissions, or remarks of the other party. 

21.  With regard to point (3), I am unable to agree.  The 1^st passage referred to the arrangement for inspection of documents made in 2010, about a year before the date of the mediation.  The scope of that arrangement is in dispute.  The respondents can certainly prove the arrangement by other means.  In no way can the letter, made months after the arrangement, even be treated as a contemporaneous document.

22.  With regard to the 2^nd passage, Mr Yuen’s submission contradicts the respondents’ own pleaded case in paragraph 44(4) of the points of defence:

“Despite repeated verbal and oral requests by the 1^st and 2^nd Respondents to confirm the quotations of the installation of the required fire service equipments, the Petitioners refused to response.”

There appeared to be more than one request and they were oral. The 2^nd passage was, at best, record of an oral request.

23.  In any case, the petitioners’ case is that the respondents failed to obtain their approvalto the fire installation works and the price was too high.  The 2^nd passage goes nowhere near to showing that the approval was obtained.

24.  The disclosure sought by the respondents is thus not necessary for the fair disposal of the case: the Farm Assist case.

The applicable principles on without prejudice communications

25.  The ‘without prejudice’ rule is a rule governing the admissibility of evidence and is founded upon the public policy of encouraging litigants to settle their differences rather than resort to litigation.  Parties should not be discouraged by the knowledge that anything that is said in the course of such negotiations (and that includes, of course, as much the failure to reply to an offer as an actual reply) may be used to their prejudice in the course of the proceedings.  They should be encouraged fully and frankly to put their cards on the table.

26.  The rule applies to exclude all negotiations genuinely aimed at settlement whether oral or in writing from being given in evidence. It does not depend on whether the label “without prejudice” was used in the negotiations.

27.  Two different public interests, namely, the public interest in promoting settlements and the public interest in full discovery between parties to litigation are involved.  In general, the without prejudice rule made inadmissible in any subsequent litigation connected with the same subject matter proof of any admissions made with a genuine intention to reach a settlement.  Admissions made to reach settlement with a different party within the same litigation were also inadmissible whether or not settlement was reached with that party.  The general public policy that applied to protect genuine negotiations from being admissible in evidence also applies to protect those negotiations from being disclosed to third parties: Rush & Tompkins Ltd v Greater London Council & anor [1989] AC 1280, 1299 D-H, 1300 G, 1301 C-D.

28.  The without prejudice privilege extends not only to admissions but also to the communications in the whole course: Unilver plc v The Procter & Gamble Co [2000] 1 WLR 2436,at 2448 H to 2449 B, per Rober Walker LJ:

“In those circumstances I consider that this court should, in determining this appeal, give effect to the principles stated in the modern cases, especially Cutt v. Head, Rush & Tompkins Ltd v. Greater London Council and Muller v. Linsley & Mortimer. Whatever difficulties there are in a complete reconciliation of those cases, they make clear that the without prejudice rule is founded partly in public policy and partly in the agreement of the parties. They show that the protection of admissions against interest is the most important practical effect of the rule. But to dissect out identifiable admissions and withhold protection from the rest of without prejudice communications (except for a special reason) would not only create huge practical difficulties but would be contrary to the underlying objective of giving protection to the parties. In the words of Lord Griffiths in the Rush v. Tompkins case [1989] AC 1280, 1300: “to speak freely about all issues in the litigation both factual and legal when seeking compromise and, for the purpose of establishing a basis of compromise, admitting certain facts.” Parties cannot speak freely at a without prejudice meeting if they must constantly monitor every sentence, with lawyers or patent agents sitting at their shoulders as minders.

Lord Griffiths in the Rush v. Tompkins case noted, at p.1300C, and more recent decisions illustrate, that even in situations to which the without prejudice rule undoubtedly applies, the veil imposed by public policy may have to be pulled aside, even so as to disclose admissions, in cases where the protection afforded by the rule has been unequivocally abused.”

29.  The without prejudice rule extends to negotiations concerning earlier proceedings involving an issue which was still unresolved: Ofulue & anor v Bossert [2009] 1 AC 990.

30.  A number of qualifications or exceptions to the without prejudice rule has been set out in Unilver plc v The Procter & Gamble C, above,  at 2444 C–2445 E:

1. When the issue in dispute is whether the without prejudice communications have resulted in a concluded compromise agreement;

2. When the issue is whether an agreement apparently concluded should be set aside on the ground of misrepresentation, fraud or undue influence;

3. Even if there is no concluded compromise, a clear statement which is made by one party to a without prejudice negotiation and on which the other party is intended to act and does in fact act may be admissible as giving rise to estoppel;

4. Where exclusion of the without prejudice communications would act as a cloak for perjury, blackmail or other ‘unambiguous impropriety’ (although this exception would only apply in the clearest cases of abuse of a privileged occasion);

5. To explain delay or apparent acquiescence in an application for striking out for want of prosecution;

6. When an issue is one unconnected with the truth or falsity of anything stated in the negotiations, and as therefore falling outside the principle of public policy protecting without prejudice communications;

7. When an offer was expressly made “without prejudice except as to costs”.  This is based on an express or implied agreement between the parties.

8. In matrimonial cases there has developed what is now a distinct privilege extending to communications received in confidence with a view to matrimonial conciliation.

31.  One can add other examples to this list:

“9. When admission was made of an “independent fact” in no way connected with the merits of the cause: dictum in Rush v Tompkins Ltd v Greater London Council, at page 1330B; Ofulue v Bossert, above.  For example an admission that a document was in the handwriting of one of the parties was received in evidence in Waldridge v Kennison (1794) 1 Esp. 142.

10. A letter that is, in its terms, an assertion of the writer’s rights and does not unequivocally indicate the writer’s willingness to negotiate, is not privileged and is admissible in evidence: Buckinghamshire County Council v Moran [1990] 1 Ch 623, at 634 G, 635 C-D.

11. When a party puts his own conduct in issue, thereby waiving any privilege attached to the without prejudice negotiations.  For example, when the issue is whether a prior settlement constituted a reasonable attempt to mitigate loss in the subsequent action: Muller v Linsley & Mortimer [1996] PNLR 74.”

Application of the principles on without prejudice communications

32.  Mr Yuen relies on the following grounds for admission of the 2 passages as evidence:

(1) They were not admissions;

(2) The passages were in no way connected with the underlying dispute of the Sun Shing case;

(3) There was waiver of privilege by the petitioners;

(4) Exclusion of the 2 passages will act as a cloak for perjury.

33.  With regard to point (1), the letter was clearly written for use at the mediation even on the 1^st respondent’s own case. Although the 1^st and 2^nd passages were not in themselves admissions but self-serving assertions of fact by the defendant, they were covered by the without prejudice principles: Unilver plc v The Procter & Gamble Co referred to in paragraph 28 above.

34.  With regard to point (2), this appears to be exceptions 6 and 9 above.  Note that the Waldridge caseconcerns use of the document, not for the truth of the contents but for a reason wholly extraneous to the contents of the letter.  Lord Griffiths expressly stated that the Waldridge case is:

“an exceptional case [which] should not be allowed to whittle down the protection given to the parties to speak freely about all issues in the litigation both factual and legal when seeking compromise and, for the purpose of establishing a basis of compromise, admitting certain facts.” Rush & Tompkins Ltd v Greater London Council & anor [1989] AC 1280 at 1300 F

35.  Mr Yuen submits that the 2 passages were in no way connected with the underlying dispute of the mediation which concerned beneficial ownership of 50% shares in Sun Shing held by the 1^st petitioner.  They did not concern the dispute over the fire prevention equipment contract and the arrangement for inspection between the parties.  The 1^st respondent did not prepare the letter to facilitate the settlement of the Sun Shing action but simply to put things on record.  The mediation was a rare opportunity for the 1^st respondent to meet face to face with the 1^st petitioner and the 1^st respondent seized it to convey the information contained in the letter to the 1^st petitioner.

36.  The pleadings in the Sun Shing case were not available for consideration.  However, the letter did not, on its face, limit its application in the way described in the preceding paragraph.  Having been read out, it cannot be said that the 2 passages were “independent facts” unconnected with the merits of the cause, whether of the Sun Shing case or the present petition.  Just a brief reading of the points of claim in this case will show that the set up and operation of business in Sun Shing were closely connected to those of the Company.  It is the contents of the 2 passages that the respondents wish to rely on in the present case.  In any case, I repeat my observations in paragraphs 20 and 33 above.

37.  With regard to point (3), presumably this is exception 11. The present case is clearly distinguishable from Muller v Linsley and Mortimer where the plaintiff put his own conduct in issue.  There, not only were the facts of reaching a settlement and its terms relevant, but the without prejudice correspondence formed part of the plaintiff’s case on making reasonable attempts to mitigate loss.

38.  There was no issue raised in the present case in connection with the prior settlement.  The respondents are unable to point to any approval for fire prevention works obtained from the petitioners.  The arrangement over inspection of documents is disputed.  It cannot be right that by simply pleading that the respondents did not seek their approval and excluded them from management that the petitioners could be said to have waived their privilege in the without prejudice discussion.  If the privilege could be so waived, it will apply to every case where mediation is unsuccessful as there will still be pleaded issues to be resolved. 

39.  With regard to point (4), this purports to be exception 4.  Mr Yuen accepts that the exception applies only to the clearest case of abusing the privilege granted to without prejudice communications.

40.  In Savings & Investment Bank Ltd (in liquidation) v Fincken [2004] 1 WLR 667,it was held that although cases of unambiguous impropriety were an exception to the general rule that without prejudice communications were inadmissible in evidence, that exception was not to be applied too readily in view of the public interest in encouraging parties to speak frankly to one another in aid of reaching a settlement; that it was not the mere inconsistency between an admission and a pleaded or stated position, with the mere possibility that such a case or position, if persisted in, might lead to perjury that led to the admitting party losing the protection of the privilege, rather it was the fact that the privilege was itself abused.

41.  The petitioners’ case is that the respondents procured the Company to engage contractors to carry out fire prevention works without first obtaining the approval of the petitioners.  The respondents procured the company to pay $1.9 million for those works when one of the contractors involved indicated to the 1^st petitioner that the works should cost only about $800,000 (paragraph 69 f and g of the points of claim). 

42.  In the points of reply, the petitioners further claim that prior to 7 July 2009, the 1^st petitioner had made enquiries with a contractor and got a quotation of about $800,000, yet the respondents claimed to have incurred costs of $1.9 million on those works. The 1^st respondent purportedly exhibited a copy of the “contract” for the works as exhibit LWD-13 of his affirmation filed on 23 December 2011, but that exhibit was only a quotation and was for $1.2 million only; there was no indication of the extent of works actually carried out.

43.  The pleaded case therefore show that the petitioners were aware of the need for fire prevention works well before the mediation was carried out and that quotations needed to be considered before committing the Company.  They criticized the respondents’ quotation and proof of costs incurred for the works.  Adducing the 2^nd passage as evidence will, at best, go towards showing another reminder from the respondents of the need for the works, the urgency and a quotation, but not the grant of any approval by the petitioners.

44.  The petitioners did not abuse the privilege attached to the without prejudice discussion eg by simply listening to (or reading) the 2^nd passage during the mediation.  There was no fraud or other vitiating conduct on their part.  There is nothing to show that the petitioners intend to or need to perjure to prove their case.  In short, there was no unambiguous impropriety on the part of the petitioners that should justify exclusion of the without prejudice rule.

45.  In summary, none of the grounds relied on by Mr Yuen are sustainable.

Conclusion

46.  The court may depart from the general principles governing confidentiality and without prejudice communications in an appropriate case.  However, there is no other greater public interest involved that can override these principles in the present case.  None of the exceptions apply.  The 2 passages are also not necessary for the fair disposal of this case and their contents can be proved by alternative means.

47.  I therefore order that:

(i) The letter as an exhibit and the relevant paragraphs of the 1^st respondent’s affirmation filed on 23 December 2011 that referred to it be struck out.  There should be an order in terms of paragraphs 1-4 of the summons, save that the reference to the letter dated 4 January 2011 be deleted as suggested by Mr Lo.

(ii) There be an order nisi, that costs follow the event and be to the petitioners, to be summarily assessed on 10 September 2012 at 4:30 pm on the papers without attendance.  The petitioners shall file and serve their statement of costs by 30 August 2012.  The respondents shall file and serve their grounds in opposition by 6 September 2012.

48.  I thank counsel for their assistance.