SHUN KAI FINANCE CO. LTD. v. JAPAN LEASING (HONG KONG) LTD. (IN CREDITORS\' VOLUNTARY LIQUIDATION)

HCA 13826/1998

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 13826 OF 1998

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D E C I S I O N

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1.  This is an application by the defendant to strike out the 3rd plaintiff’s claim in the Amended Statement of Claim and the Particulars of Damage and to dismiss the 3rd plaintiff’s action against the defendant.

Background

2.  This action was started 10 years ago.  The parties however have not been idling as there are other actions between them and they have been working hard on these other actions. 

3.  There have also been a number of important developments in this action.  The 1st plaintiff was wound up on 5 November 2003.  Its liquidator settled its claim with the defendant.  Its action against the defendant was dismissed by consent on 20 April 2006.  Regarding the 2nd plaintiff, he was adjudged a bankrupt on 6 October 2006.  The defendant applied on 2 June 2008 to strike out the Amended Statement of Claim and the Particulars of Damage vis-à-vis the 2nd and 3rd plaintiffs and to dismiss their actions.  Registrar Au Yeung acceded to the application in relation to the 2nd plaintiff on 11 June 2008, but referred the application as against the 3rd plaintiff to be dealt with by a judge of this court.

4.  The grounds of the defendant’s application are that the Amended Statement of Claim and the Particulars of Damage disclose no reasonable cause of action against the defendant, they are scandalous, frivolous and vexatious, they may prejudice, embarrass and delay the fair trial of the action and they are an abuse of the process of court.  It turned out that the arguments were only under the first ground, namely whether there is a reasonable cause of action.

The 3rd Plaintiff’s Case

5.  The Amended Statement of Claim pleads that the 1st plaintiff was a licensed money lender carrying on business in Hong Kong.  The 2nd and 3rd plaintiffs are husband and wife.  They were the legal and beneficial owners of no less than 90% of the 1st plaintiff’s shares.  The 2nd plaintiff used to have full control of the 1st plaintiff.  They earned a living from the 1st plaintiff’s business. 

6.  There was an agreement between the 1st plaintiff and the defendant (“the Governing Agreement”) dated 19 May 1993 under which the defendant agreed to lend money to the 1st plaintiff.  The 1st plaintiff used the funds advanced by the defendant as well as its own funds for lending to its customers.  The Governing Agreement required the 1st plaintiff to obtain mortgage security from its customer upon lending to the customer and further required the 1st plaintiff to execute legal sub-mortgage in relation to the lending in favour of the defendant.  The Governing Agreement also authorized the 1st plaintiff to demand and receive repayment from its customers the moneys that had been lent by the defendant to it and lent on by it to its customers.

7.  The Governing Agreement further provided that if the 1st plaintiff should default in repayment to the defendant or in complying with the terms of a sub-mortgage and facility letter of a loan, then the authorization to the 1st plaintiff to collect repayment maybe revoked upon seven working days prior notice by the defendant.

8.  Prior to the execution of the Governing Agreement, the 2nd plaintiff on behalf of the 1st plaintiff had orally agreed with the defendant’s executive one Mr Leung that the defendant would not revoke the 1st plaintiff’s authorization except when the 1st plaintiff had been given seven days prior notice of revocation and that the 1st plaintiff failed to make good the default within that seven days period.  This oral agreement is pleaded as the Collateral Agreement.  The 1st plaintiff executed the Governing Agreement in reliance upon the Collateral Agreement.  The defendant is thus estopped from denying that the Governing Agreement has the effect as contended by the plaintiffs or the effect of the Collateral Agreement. 

9.  The defendant however breached the Governing Agreement or the Collateral Agreement by directing a substantial number of the 1st plaintiff’s customers to make repayment directly to the defendant but without giving the 1st plaintiff the seven days prior notice.  The 1st plaintiff has identified a number of such customers who complied with the defendant’s direction and ceased making payment to the 1st plaintiff. 

10.  Such conduct of the defendant also constituted tortious procurement by the defendant of breaches by the 1st plaintiff’s customers of their contracts with the 1st plaintiff by failing to make repayments to the 1st plaintiff. 

11.  As a result, the 1st plaintiff suffered loss and damage, in particular the loss of the moneys received by the defendant and the loss of business opportunity and future income.  Furthermore, the defendant has negligently diminished and/or destroyed the value of the 1st plaintiff to its owners namely the 2nd and 3rd plaintiffs and has caused loss and injury to them. 

12.  The particulars of negligence are the defendant’s failure to have regard to the Governing Agreement or the Collateral Agreement and/or the irrevocable authorization given to the 1st plaintiff to receive payment from its customers, or to take care not to injure the business of the 1st plaintiff thereby injuring the 2nd and 3rd plaintiffs or to distinguish between the moneys lent by the defendant to the 1st plaintiff or the 1st plaintiff’s own moneys.

13.  The particulars of loss and injury pleaded in the Amended Statement of claim are the deprivation of the livelihoods of the 2nd and 3rd plaintiffs and their emotional distress, anguish and inconvenience.

14.  The particulars of damage pleaded separately in the Particulars of Damage say that if the defendant should have given the 1st plaintiff the seven days prior notice, the 1st plaintiff would have remedied the alleged breaches.  As a result of the defendant’s breach, the 1st plaintiff’s business including goodwill was completely or substantially destroyed.  The 1^st plaintiff thus lost its then business, its goodwill and the opportunity to undertake new business.  It’s then existing business was generating gross annual profits in excess of HK$10 million.  The 1st plaintiff also expected to earn HK$9 million annually in a new business product involving the Home Ownership Scheme.

15.  Prior to the defendant’s wrongful conduct, the 2nd and 3rd plaintiffs directly or through companies under their control enjoyed substantial benefits like fees of HK$3 to HK$5 million, rental subsides of more than HK$1 million and traveling subsidies of more than HK$150,000 every year.  The shareholdings of the 2nd and 3rd plaintiffs in the 1st plaintiff were also of a substantial value and would have a worth of HK$90 million but for the defendant’s breach.  The plaintiffs also contend that in ascertaining their damages, the Court should capitalize the lost earnings and benefits for at least 10 years.

The 3rd Plaintiff’s Application to Re-amend the Amended Statement of Claim

16.  On 8 September 2008, the 3rd plaintiff issued a summons to re-amend the Amended Statement of Claim.  The 3rd plaintiff intended to plead a further ground of negligence against the defendant in that the defendant had failed to take care not to injure the interest of the 3rd plaintiff including her interest as the wife and a dependent of the 2nd plaintiff and thereby caused loss and injury to her.  Under the particulars of loss and injury, she intended to add a few more items of claim.  The first item is her loss of financial support from the 2nd plaintiff as he had been financially ruined by the defendant’s negligence and was declared bankrupt on 6 October 2006.  The next item is her loss of substantial family and personal assets including a portfolio of investment properties which she was forced to liquidate prematurely to meet her liabilities, which liabilities, but for the defendant’s negligence, she would have been able to satisfy without suffering such loss.  She also wanted to add her development of a uterine tumor and her ongoing mental suffering involving a tendency to commit suicide.  She also intended to plead that all these losses were reasonably foreseeable by the defendant as her situation and family affairs were known to the defendant through its executive Mr Leung.

17.  Counsel for the 3rd plaintiff also added in oral submissions that the 3rd plaintiff’s liabilities which she sought to add by re-amendment included her liabilities as a guarantor to the debts of the 1st plaintiff and of other members of the 1st plaintiff’s group of companies.

18.    The 1st plaintiff’s application to re-amend is opposed by the defendant.  Mr Ng, counsel for the defendant, submitted that the proposed amendments cannot make good the Amended Statement of Claim and they also do not disclose any reasonable cause of action.  Leave should therefore not be given for the amendments to be made.  Both the defendant’s application to strike out and the 3rd plaintiff’s application to re-amend the Amended Statement of Claim are heard together.

Grounds for Striking Out

19.  The defendant has two grounds for the striking out.  The first ground is that the 3rd plaintiff’s claims of loss are of two kinds, namely pure economic loss and non-financial loss such as emotional distress.  Mr Ng submitted that the defendant has no liability to the 3rd plaintiff for either type of loss.  The second ground is that the 3rd plaintiff cannot recover reflective loss from the defendant.

Reflective Loss

20.  The reflective loss of a shareholder is a reflection of the loss suffered by his company.  The rule against reflective loss has been discussed in Johnson v Gore Wood & Co. a firm [2002] 2 AC 1 and Gardner v Parker [2004] 2 BCLC 554.  It has also been discussed by the Court of Appeal in Landune International Ltd v Cheung Chung Leung [2006] 1 HKLRD 39 at 43F-G and by Reyes J in Hotung v Hillhead Ltd [2008] 3 HKLRD 200.

21.  The claims by the 3rd plaintiff for loss of the benefits she used to derive from the 1st plaintiff and the loss of value of her shares in the 1st plaintiff are reflective losses.  Mr Swaine, counsel for the 3rd plaintiff, made it clear at the hearing that the 3rd plaintiff is not seeking any reflective loss.  The items of claim that are reflective losses are therefore abandoned by the 3rd plaintiff.  Counsel said the 3rd plaintiff is claiming the defendant for breach of a duty owed by the defendant to her directly.  Counsel further said that if the 3rd plaintiff can establish such duty, then damages may be recoverable by her.

Pure Economic Loss

22.  Mr Ng for the defendant submitted that the 3rd plaintiff is also not permitted to mount a claim of negligence against the defendant for pure economic loss.  Her alleged loss of substantial benefits from the 1st plaintiff was pure economic loss and should be barred.  The defendant relies on Murphy v Brentwood District Council [1991] 1 AC 398, Bank of East Asia Ltd v Tsien Wui Marble Factory Ltd (1999) 2 HKCFAR 349, Linfield Ltd v Taoho Design Architects, HCCT 68/2001 and Re Fully Well Investment Ltd, HCCW 1056/2002 at paras. 33 to 36.

23.  Counsel submitted that in the light of Murphy, economic loss is only recoverable on the basis of the principle of Hedley Byrne in which there is a special relationship between the parties.  The relationship may be found where a party has assumed responsibility to another for making a statement or for performance of services and the other party relied on such statement or service.

24.  Mr Swaine however submitted that the law on economic loss has developed and is still developing.  He suggested three approaches that can be taken to determine the recoverability of economic loss.  He referred to paras 8-86 and 8-89 of Clerk & Lindsell on Torts, 19^th edition.  The three approaches are the assumption of responsibility test, the three stage test of forseeability, proximity and fairness, justice and reasonableness (introduced by the House of Lords in Caparo Industries v Dickman [1990] AC 605) and the incremental approach.

25.  I agree with the defendant that the 3rd plaintiff’s claim for pure economic loss must fail.  The reason being that there is no pleading of any special relationship between the 3rd plaintiff and the defendant, or that the defendant had assumed any responsibility to the 3rd plaintiff for making of any statement or for provision of any service whether to the 1st plaintiff or otherwise or any reliance by the 3rd plaintiff on such statement or service.  The principle of law pronounced in Murphy is good and I must abide by it.

26.  However, even if I should go through the three approaches suggested by Mr Swaine, the result is the same.  I have already said that there was no assumption of responsibility by the defendant.  For the three-stage test, the relationship between the defendant and the 3rd plaintiff as a shareholder of the 1st plaintiff is not proximate enough for a duty on the part of the defendant to arise.  It is also not fair to the defendant to impose such a duty on it.  To do so would mean that the defendant would also have a duty to the 1st plaintiff’s other shareholders, directors, employees, creditors, its holding company and subsidiaries as well.  It is unfair and unreasonable to do so.  To impose such a duty also amounts to a radical approach rather than an incremental approach in the development of this branch of the law.

Loss for Emotional Distress

27.  The defendant submitted that losses for emotional distress, anguish and inconvenience and the 2nd plaintiff’s loss of reputation in the business world are irrecoverable as a matter of law.  I am referred to a line of cases starting from Addis v Gramaphone Co. Ltd [1909] AC 488, Watts v Morrow [1991] 1 WLR 1421, Ruxley Electronics v Forsyth [1996] AC 344 and Johnson v Gore Wood & Co.  The exceptions are cases of contract to provide leisure and relaxation.  They do not apply to this case.  I do not think the 3rd plaintiff has any answer to this argument.

The Proposed Re-amendments

28.  Regarding the proposed re-amendments, the defendant submitted that they also disclose no reasonable cause of action.  The 3rd plaintiff’s intended claim for loss of financial support from the 2nd plaintiff, who was a shareholder and director of the 1st plaintiff, is a claim for pure economic loss.  It has no basis as the defendant owed no duty to the 3rd plaintiff in relation to such financial support.  There is also no claim of any special relationship.  The same applies to her intended claim for loss in her family and personal assets due to premature disposal to meet her liabilities which included liabilities under guarantees given by her for the 1st plaintiff and other companies in the 1st plaintiff’s group.

29.  Finally, her intended claim based on the development of a uterine tumour and mental sufferingare not physical injuries inflicted by the defendant.  These, if proved, are only illness and suffering brought about by emotional distress and anguish.

30.  All these proposed amendments disclose no reasonable cause of action.  I will not give leave for them to be included in the Amended Statement of Claim.

Decision

31.  In the light of my discussions above, I strike out the Amended Statement of Claim and the Particulars of Damage and dismiss the 3rd plaintiff’s action against the defendant.  I also dismiss the 3rd plaintiff’s summons to re-amend the Amended Statement of Claim. 

32.  I make an order nisi that the 3rd plaintiff do pay the defendant the costs of the defendant’s summons to strike out and the 3rd plaintiff’s own summons to re-amend.

Appeal dismissed: see CACV323/2008 dated 18 May 2009

HCA 13826/1998

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 13826 OF 1998

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D E C I S I O N

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1. In a written judgment handed down on 8 February 2000, I allowed the 1st Plaintiff's appeal and made a cost order nisi that both the cost of the appeal and the cost of the hearing before the Master be to the 1st Plaintiff in any event. The Defendant later applies for a variation of that order nisi on the following grounds:-

(a) a different point was argued by the 1st Plaintiff at the hearing before the Master;

(b) the 1st Plaintiff insisted on obtaining an express undertaking from the Defendant which was not given by the Master.

2. The issue between the parties at the appeal hearing was in short whether the 1st Plaintiff's documents "disclosed" pursuant to Ord. 24 r. 10 should be subject to an undertaking (whether expressly given or implied by law) not to use them for other purposes than the litigation in question. Mr Ng for the Defendant considers that Mr Swaine for the 1st Plaintiff has at the hearing before the Master also advanced an argument denying the 1st Plaintiff's liability to make "disclosure". Mr Swaine, on the other hand, disagrees that he had done so. The disagreement between counsel resulted in the hearing being adjourned so that the official transcript relating to the Master's hearing can be obtained. The Defendant's solicitors have very helpfully obtained the transcript from the court after the said adjournment and the transcript is now before me.

3. Mr Ng refers me to pages 6O to 7J, 8T to 9E and 11H to 12O of the transcript in support of his said argument. However, I do not consider Mr Swaine was advancing a separate contention after I have read these passages in the context of his submissions made before the Master: see especially page 6O to P and page 7 N to R. I rather understand him to be arguing (as an alternative to his primary argument that an undertaking ought to be ordered or declared) that if the Defendant is insistent on not giving or agreeing to an undertaking, the court should simply refuse its application without giving the Defendant the option of a "disclosure" order upon terms.

4. As to the question of whether the 1st Plaintiff insisted on an express undertaking, having read the pre-hearing correspondence, the affirmation filed on behalf of the 1st Plaintiff and the official transcript, I do not find that the 1st Plaintiff had insisted on obtaining an express undertaking and would not accept anything else.

5. Even if Mr Swaine had advanced a different argument at pages 6 to 7 and 8 to 9 of the transcript, that point only took up about 3 pages of a transcript lasting for about 20 pages in total (up to the time when the Master pronounced his decision). I do not consider in these circumstances that a different costs order is warranted according to the principles set out in Re Elgindata (No. 2).

6. For the above reasons, I do not consider that the costs order nisi should be varied. In coming to this conclusion, I have taken into account the fact that what Mr Swaine said at pages 6 to 7 and 8 to 9 of the transcript had resulted in certain responses from both Mr Ng (at pages 11 to 12 thereof) and the Master (at page 19 thereof).

HCA 13826/1998

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 13826 OF 1998

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J U D G M E N T

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Introduction

1. This is P1's appeal against the order of Master Lok dated 7 September 1999 where he ordered P1 to provide photocopies of the documents set out in para. 1 of the Defendant's summons dated 16 June 1999 to the Defendant within 14 days and for the inspection of these documents (these documents are "the requested documents").

2. According to the Amended Statement of Claim, P1 is and was a licensed money lender and P2 and P3 are the legal and beneficial owners of not less than 90% of P1's shares. P2 has control of P1's business and affairs. The Plaintiffs claim that by an agreement made between P1 and the Defendant, the Defendant agreed to lend money to P1 and P1 used the money to carry on its business of lending to its customers.

3. At para. 5 of the Amended Statement of Claim, the Plaintiffs allege that the Defendant breached the said agreement by sending written notices to some of P1's customers asking them to repay to the Defendant instead of P1. P1 then sets out the details of its customers relevant to this allegation, including their names, loan agreement details, the amounts of the loans and instalment payments and the dates of the Defendant's notices.

4. The requested documents include the original loan agreements made between P1 and its above mentioned customers. In his written skeleton submissions, Mr Swaine for P1 made it clear that P1 does not dispute it should disclose the requested documents (including the said loan agreements). The issue which divides the parties in this appeal is whether there is an implied undertaking on the Defendant's part not to use those of the requested documents disclosable under R.H.C. Ord. 24 r. 10 for purposes other than this litigation. P1 argues that there is and the Defendant argues to the contrary.

5. So far as the requested documents are concerned, I understand they have already been disclosed to the Defendant's solicitors who are holding them pending the outcome of this appeal.

Cases relied upon by the Defendant

6. It is accepted by the Defendant that in relation to documents discovered under what can be called the "ordinary discovery process", the "party who obtains discovery may use the documents disclosed to him only for the proper purposes of conducting his own case, and there is an implied undertaking by him not to use them for any collateral or ulterior purpose": see, for example, The Supreme Court Practice 1999, Vol. 1, para. 24/14A/2 citing The Distillers Co. [1975] Q.B. 613 and other cases. The Defendant contends, however, that there is no such implied undertaking if the disclosure of documents is made pursuant to Ord. 24. rr. 10 and 11 which respectively read:-

"10. - (1) Any party to a cause or matter shall be entitled at any time to serve a notice on any other party in whose pleadings, affidavits or witness statements reference is made to any document requiring him to produce that document for the inspection of the party giving the notice ...

(2) The party on whom a notice is served under paragraph (1) must ... serve on the party giving the notice a notice stating a time ... at which the documents ... may be inspected ..." (Ord. 24 r. 10);

"11. - (1) If a party who is required by rule 9 to serve such a notice as is therein mentioned or who is served with a notice under rule 10(1)―

(a) fails to serve a notice under rule 9 or, as the case may be, rule 10(2) ...

then subject to rule 13(1), the Court may, on the application of the party entitled to inspection, make an order for production of the documents in question for inspection ..." (Ord. 24 r. 11).

7. This contention derives support from a first instance decision in Eagle Star Insurance Co. Ltd v. Arab Bank plc, unrep., 25 February 1991. The facts of that case are different from those herein and irrelevant for the purpose of this appeal. The plaintiff therein applied to the learned Judge to use the documents disclosed by the defendant free of restriction. The parts of the Judgment relevant to this issue appear at pp. 4 to 6 of the transcript. The relevant passages are:-

"The next point is the significance of the conclusion that these documents are referred to either in the pleading or in that affidavit ..." (p. 4);

"Mr Templeman [for the defendant] submitted that O. 24, r. 10 is and must be viewed as the same type of discovery exercise as any other part of O. 24 and, therefore, anything obtained under O. 24, r. 10 must be subject to the same duty and the same implied undertaking as documents obtained on discovery in the conventional sense. However, that is radically to misunderstand the character of O. 24, r. 10, which dates back to the last century and was the subject matter of the decision of the Court of Appeal in Quilter v. Heatley 23 Ch. Div. p. 42.

The essence of what the Court of Appeal there say is, as regards pleadings, that a pleading should be approached on the basis that it sets out in full all the documents which are referred to in that pleading. If one cared not whether pleadings were kept within reasonable length, then that was what would have to be done. However, documents are instead referred to in pleadings without their being set out in extenso and then there is a right to require the pleading party to produce the document.

'The rules were evidently intended to give the opposite party the same advantage as if the documents referred to had been fully set out in the pleadings.'

- as was said by Lindley LJ at p 50. It is essentially a matter of enabling the opposite party to understand fully what is in the other side's pleading and, in effect, to have it fully particularized. ... The machinery by which he obtains that particularity is to entitle him to have produced to him the document which is referred to in the pleading. The same type of reasoning applies, as is set out in that case, to affidavits as well. ... It may be ... that it is viewed ... as a matter of the application of the best evidence rule ...

It will be appreciated from this that, although on a number of occasions this machinery has been referred to as an exercise of discovery (and one can understand how that might happen - the Court of Appeal in Rafidan Bank case referred to a 'discovery' application - the Order in which r. 10 appears is entitled 'Discovery and Inspection of Documents'), it is not, in essence, a discovery exercise. Its history is different, its function is different." (pp. 5-6) (underline supplied).

8. The learned Judge went on to say this:-

"I consider that the Vice-Chancellor in the Derby v. Weldon No. 2 case was entirely correct in the way that he chose to deal with it. If a party chooses to refer to a document in his pleading ... then he waives the right of privacy that previously existed. The Vice-Chancellor, in my judgment, correctly identified the underlying principle, which gave rise to the implied undertaking, as being the invasion of privacy. That was how Lord Denning put it, in particular, in the Riddick case. The party who chooses to refer to a document in his pleading or in his affidavit or elsewhere in his evidence, in the words of the Vice-Chancellor, 'destroys the privacy of the document'. It is the party who has destroyed the privacy of the document, not the plaintiff or the Court ..." (p. 6);

"I considered that Derby v. Weldon was a case that should be followed, that it was correct in principle, that the principle was one of compulsion which applied only to discovery properly so called and did not apply where a party voluntarily produced documents or voluntarily referred to documents in his evidence. The Prudential Assurance case was concerned with witness statements that had been served voluntarily by a party pursuant to an order under O. 38, r. 2(a)." (pp. 6-7).

9. The Quilter case [Quilter v. Heatley (1883) 23 Ch. D. 42] referred to in Eagle Star was also relied on by Defence counsel. The plaintiff there by his statement of claim referred to certain entries in his own books, to 2 letters written to himself and to 2 letters written by himself. The defendant applied for production of those documents. The plaintiff's solicitors refused to produced any of them on the ground the defendant had not delivered the statement of defence. The observations of Lindley, L.J. in that case were made in that context and the issue before the Court of Appeal was when should a litigant disclose documents referred to in his pleadings, not whether an implied undertaking existed.

10.Derby v. Weldon, The Times, 20 October 1988 was another case referred to in Eagle Star which was also relied on by the Defence. To summarized what happened in that case, documents were obtained by a plaintiff in English proceedings from the defendant in the course of applying for a Mareva injunction order. A plaintiff in U.S. proceedings learnt of this and obtained a subpoena against the English plaintiff asking it to appear before the U.S. plaintiff's attorney with those documents. The English plaintiff applied to quash the subpoena. The Court of Appeal decided that the documents were disclosable on the following grounds:-

(a) documents which belonged to the English plaintiff were not subject to any restriction;

(b) documents voluntarily supplied by the defendant not under any compulsion were also not subject to any restriction;

(c) affidavits sworn by the defendant and lodged with the Chief Master and which the defendant elected to rely upon;

(d) documents which had been "read in open court" which included those lodged with the court and read by the judges before coming into court fell within Ord. 24 r. 14A.

Was Eagle Star Correctly Decided?

11. Mr Swaine for the Plaintiff frankly accepts that the decision in Eagle Star was directly against his arguments but he argues the reasoning in that decision was flawed. It is therefore necessary to decide whether Mr Swaine's argument is correct and I therefore ought not follow that case.

12. In my view, that issue should be considered by examining the following:-

(a) the logic in the reasoning adopted in Eagle Star;

(b) construction of the relevant rules of court;

(c) policy considerations.

(1) Logic in the Reasoning

13. It appears that the decision made in Eagle Star was based on the following grounds:-

(a) disclosure of documents under Ord. 24 r. 10 is not properly "discovery" because it has a different history and serves a different function;

(b) by pleading a document (or referring to it in affidavits), that litigant waives any right of privacy.

14. As regards point (a) above, the learned Judge relied on the Quilter case and the Derby case. However, these 2 cases were not concerned with the existence or otherwise of the implied undertaking. The observations made therein were made in different factual context, for example, enabling the other litigant to know of the full details of the pleaded case (or the evidence filed), the underlying purpose of which is to ensure that there is a "level playing field" between the litigants. There is no logical or necessary connection between that purpose and whether an implied undertaking exists or should exist.

15. As regards point (b), the learned Judge concluded that if "... a party chooses to refer to a document in his pleading ... then he waives the right of privacy that previously existed ..." (at p. 6 of the transcript of Eagle Star). Later, he said it "... is the party who has destroyed the privacy of the document, not the plaintiff or the Court ...". With respect to the learned Judge, the reason he gave seems to be circular. A litigant destroys "the privacy of the document" only because the Courts decide that he does. The fact remains that the reason why he needs to do so (whether it serves the purpose of "discovery" or ensuring "a level playing field") is that it was prescribed by rules of the Court, not that the litigant wants to disclose the document which was pleaded.

16. Insofar as it is argued that no compulsion is involved under Ord. 24 r. 10, but there is compulsion under what was described as "properly called 'discovery'" (for example, a discovery under Ord. 24 r. 9), I find the "distinction" to be strained. Discovery of documents was prescribed by inter alia Ord. 24 r. 9, just as "disclosure" of pleaded documents was prescribed by Ord. 24 r. 10. It is trite law that ignorance of law is no defence (in relation to the obligation under either rule to "disclose" documents). Hence, it can equally be argued that when a litigant chooses a particular way of pleading his case, for example, pleading a cause of action in contract, he expects that documents which "relate to one or more of the matters in question in the cause or matter" would be disclosable. Since he chooses to bring the action in that manner, he can also be regarded as "volunteering" himself to the discovery process. Such a litigant can also be said to have "waived" the privacy of the documents. I therefore do not agree that a litigant who pleads a document waives its privacy when at the same time no such waiver is attributed to a litigant who is liable to discover documents relating to one or more of the matters in question in the cause or matter.

(2) Construction of Rules of Court

17. The relevant rules have been set out above. Ord. 24 r. 14A which provides that:-

"any undertaking, whether express or implied, not to use a document for any purposes other than those of the proceedings in which it is disclosed shall cease to apply ... after it has been read to or by the Court, or referred to, in open court ... ",

does not make any express distinction between documents disclosed under Ord. 24 r. 10 and those disclosed under the other rules of Ord. 24. This provision by itself is therefore of little help to me.

18. Ord. 24 r. 11(1) which relates to the Court's power to order the production of documents for inspection expressly refers to both a notice served under r. 9 and one served under r. 10(2). The two were set out therein in juxtaposition to each other and appear to be treated in the same way. This, coupled with the lack of distinction in Ord. 24 r. 14A between documents disclosed under Ord. 24 r. 10 and those under the other rules of Ord. 24, makes me conclude that as a matter of construction, Ord. 24 makes no distinction (regarding the nature of the disclosure process) between documents disclosed under Ord. 24 r. 10 and those disclosed under the other provisions.

19. Under Ord. 63 r. 4(1)(a), any person shall on payment of fee be entitled to inspect and obtain a copy of any writ of summons. However, I do not consider this means that any document pleaded therein should also be available to the public. Hence, I do not find that any waiver of privacy of the pleaded document (as opposed to the pleading itself) arises out of this rule.

(3) Policy Considerations

20. Mr Ng for the Defendant submitted that there is no policy reason for concluding that an undertaking should be implied in relation to documents disclosed under Ord. 24 r. 10 because:-

(a) disclosure thereunder is already limited by the question of relevance of the document;

(b) sufficient protection has been given by the provision of the Personal Data (Privacy) Ordinance, Cap. 486.

21. Relevance by itself does not appear to me to be a sufficient safeguard to privacy of the document. Merely because a document (or part(s) of it) is relevant does not mean that the party who obtained it should be able to put it to unrestricted use. As regards Mr Ng's point (b), it is possible that a disclosable document may not be document containing "personal data" and therefore Cap. 486 does not apply to it.

22. On the other hand, there is good policy reason for implying an undertaking because it would enable the Courts to retain control over the use of the documents disclosed and at the same time having the discretionary power to release such undertaking. Further, implying such an undertaking relating to documents obtained under Ord. 24 r. 10 would result in a consistent approach regarding documents liable to be discovered.

Conclusion

23. For the above reasons, I differ from the conclusion of the learned Master, who must have felt that he was bound by the decision in Eagle Star. The appeal is therefore allowed to the extent that I find that an undertaking is also implied in relation to documents disclosed under Ord. 24 r. 10.

Costs Order Nisi

24. The parties have raised no objection to a costs order nisi being made in this Judgment. There is no apparent reason why costs should not follow the event. The costs of this appeal and the application before the

learned Master (with certificate for counsel for the hearing of 7 September, 1999) are therefore to be paid by the Defendant to P1 in any event.

HCA13826/98

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 13826 OF 1998

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REASONS FOR DECISION

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1. This is an appeal against the Order of Master POON, dismissing the defendant application for leave to try certain preliminary issues, the particulars of which have been fully set out in the summons itself.

2. The background of this case can be briefly summarised as follows: The defendant financed the 1st plaintiff with loans and having obtained the loans from the defendant, the 1st plaintiff then lent money to various sub-borrowers. It is not disputed that on top of the loans from the defendant, the 1st plaintiff also made use of his own money. As security for such lending, there

were mortgages between the 1st plaintiff and the sub-borrowers, and there were also mortgages between the 1st plaintiff and the defendant.

3. In addition to the sub-mortgages there was also a Governing Agreement between the 1st plaintiff and the defendant whereby the 1st plaintiff was authorised to receive mortgage repayments from the sub-borrowers directly. The 1st plaintiff would then make payments to the defendant. The defendant alleged that the 1st plaintiff defaulted on his payment to the defendant and the defendant then sought to exercise his power under the Governing Agreement and the sub-mortgages to require the sub-borrowers to make payments or re-payments directly to the defendant.

4. It is the plaintiffs' case, on the other hand, that the defendant was in breach of the Governing Agreement by requiring the sub-borrowers to make direct payments to it and hence the present claim. In the original statement of claim the 1st plaintiff raised a number of matters. Firstly, when the defendant directed the sub-borrowers to make payments to it instead of the 1st plaintiff, the defendant was actually in breach of the Governing Agreement in particular, Clause 5 thereof which stipulates that the defendant can only revoke the authorisation granted to the 1st plaintiff to receive payments from the sub-borrowers upon seven working days prior notice, when the 1st plaintiff was in default of the repayments of the loan and interest thereon.

5. Secondly, the 1st plaintiff alleged that the defendant, in directing the sub-borrowers to make payment directly to it instead of the 1st plaintiff, the defendant conduct constituted tortious procurement of breaches of contract by the sub-borrowers towards the 1st plaintiff. And in so far as the plaintiffs are concerned, the defendant conduct destroyed and/or diminished the value of the 1st plaintiff, thereby causing loss and injury to the 2nd and the 3rd plaintiff who are the shareholders and directors of the 1st plaintiff.

6. The defendant contended that the authority granted to the 1st plaintiff to receive payments from sub-borrowers would cease or extinguish upon default and/or breach of the contract on the part of the 1st plaintiff. Alternatively, the defendant contended that there had been three notices of revocation; on 1 July, 23 July and 8 October 1998, which notices terminated the authority granted to the 1st plaintiff.

7. The matter had been made slightly more complicated by the plaintiffs' recent application to amend the statement of claim to include the suggestion that the defendant could not revoke the authorisation granted to the 1st plaintiff except with a seven days express prior notice and that the 1st plaintiff had failed to make good any default within such period of time.

8. I am given to understand that the 1st plaintiff application to amend the statement of claim was contested and had been adjourned for argument before the Master. In addition to the present action, there are also, I am given to understand, four related actions and one potential action between the defendant and the 1st and/or 2nd and/or 3rd plaintiff. In those actions or potential action, the defendant is seeking to recover money lent to the plaintiffs or companies controlled by them.

9. The defence raised by the plaintiffs in those actions is that they are not liable to pay because of the claim or counterclaim against the defendant in the present action. Mr NG, on behalf of the defendant suggested that the main issue is whether the defendant was entitled to give the notices to the sub-borrowers to make payments directly to the defendant instead of the 1st plaintiff. Or whether the 1st plaintiff authorisation to receive payments ceased automatically from the date of the default or, in any event, from the date of the said notices on 1 July, 23 July or 8 October 1998.

10. Mr NG, suggested that those issues are central to the present case as well as to the other actions or potential action between the parties. The resolution of those issues, so Mr NG suggests, will be highly expedient, not just for the present action but for the other actions and/or potential action. Speaking for myself, I do not consider the impact of a decision of the present proceedings on the other actions or potential action is of too much significance in the resolution of the issues before me. There has been no order for consolidation. The issues involving those other actions are not, in my view, matters I should attach too much significance.

11. Mr NG argued that before the plaintiffs raised the further issues as set out in the proposed amendment of the statement of claim, the issue involved in the case is almost purely a question of law. He suggests that the non-admission of the default on the repayment to the defendant by the 1st plaintiff can be sorted out quite easily as it would not be possible for the plaintiff to deny such a default on the repayment on affidavit or affirmation.

12. Mr NG, in his argument further suggested that the attempt to amend the statement of claim was made mala fide and was concocted for the sole purpose of defeating the defendant present application. Mr NG suggested that the court should completely ignore the matters raised in the proposed amendment to the statement of claim by the plaintiffs, as those allegations were made very late in time and it was not even made in other proceedings when the background giving rise to such matters are identical.

13. On this aspect I think it is right for me to point out that the plaintiffs' application to amend the statement of claim is still a matter that is pending. It is not my primary function in the present case to resolve such matters. Indeed, in my view it would be wrong for me to do so, as this matter is not before me and if I were to make any finding on such a matter, it will create a rather embarrassing situation for whoever has to resolve that particular matter. I shall be usurping the function of the Master before whom the matter has now been listed.

14. If I were to proceed with the matter on the basis that the proposed amendments are to be completely ignored, the court will also be put in a difficult position or situation if subsequently the proposed amendment were to be allowed in due course. The defendant chose to proceed with the present application before the application to amend the statement of claim by the plaintiff has been disposed of. It is in my view only right that so far as this case is concerned, it should be considered as if the proposed amendment is allowed.

15. In order to avoid the rather unsatisfactory situation that the court had earlier indicated, Mr NG suggests that even if the proposed amendment is allowed, the allegation of an oral agreement is not a bar to the trial of the preliminary issues as proposed by the defendant. He said the factual issue raised by the proposed amendment is a simple one and that all that is required is for two more witnesses to be called to give evidence and be cross-examined on the alleged oral agreement.

16. It is not my function at this Hearing to decide how the issues pertaining to the alleged oral agreement is to be resolved. Whether it involves just the two witnesses remains a matter to be seen. But to adopt the proposed suggestion by Mr NG, the matter is no longer a trial of a preliminary issue. It is in fact a full trial involving not just matters of law but matters of fact as well.

17. In any event, the suggestion put forward by Mr NG, would not dispose of the claim by the 2nd and the 3rd plaintiff. If the defendant is somehow saying that a claim by the 2nd and the 3rd plaintiff has absolutely no merit and cannot stand at all, perhaps proper steps ought to be taken to have those claims struck out but that is not an issue before me and apparently no attempt has been made to achieve such a purpose.

18. In my view it is not the purpose of Order 33 to cater for situations as demonstrated in the present application. In my view the suggestion or application by the defendant is neither just nor convenient and it certainly will not save any costs. I have not been persuaded that there is justification for departing from the normal procedure or rule by ordering the trial of the preliminary issues as sought by the defendant.

19. Whether the parties should consider to separate the question of liability and quantum is a matter for the parties to consider. As I have observed in the course of counsel argument that to accede to the request by the defendant is indeed to allow the defendant a speedy trial through the back door, when there is no justification, indeed no application in that regard.

20. Having considered counsel argument and the background of this matter, I am satisfied that the learned Master had in fact come to a correct decision and that his decisions are not to be interfered with. In the circumstances the appeal has to be dismissed.

Representation:

Present: Mr Kenneth NG instructed by Messrs. Baker & McKenzie for Defendant/Appellant

Mr John J.E. Swaine instructed by Messrs. Yolanda Fan & Co. for Plaintiffs/Respondents