READY SET GOAL LTD (IN LIQUIDATION) AND ANOTHER v. KAY-EL (HONG KONG) LTD

HCA 223/2013

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

HIGH COURT ACTION NO 223 OF 2013

_________________________

_________________________

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D E C I S I O N

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THE APPLICATION

1.  The defendant (“D”) applies by way of summons for security for D’s costs against the plaintiffs (“Ps”) from the next CMC up to the conclusion of the trial in the total sum of $4,588,258.  D now concedes that the demand for security for costs is $4,531,258.

2.  Ps do not dispute their liability to provide security for costs.  They only contest the quantum.  The parties are legally represented.[1]

ISSUES OF DISPUTE

3.  Ps have previously by consent provided $750,000 as security for costs in 2013 up to the first CMC.

4.  The factual background was set out in my previous Decision dated 18 November 2014 and in Deputy Judge Seagroatt’s Decision dated 20 April 2015 [2015] 3 HKLRD 1.  It is not necessary to repeat it here.

5.  D seeks further security of HK$4,531,258 on top of the security of $750,000 already paid by Ps[2]. Ps are only willing to provide further security of HK$1,200,000 up to the stage of the conclusion of the whole trial.

6.  D seeks a lump sum payment into court in line with common practice.  Ps suggest payment into court by installments, or provision of a bank guarantee in lieu of payment into court.

7.  The applicable legal principles were set out in my previous Decision: Saturn Storage Ltd v Tsoi Tin Chun & Ors (unreported, HCA 1265/2012, 15 November 2013).  There is no dispute over those legal principles.  I shall apply them to the application accordingly.

D’S CASE

8.  D has set out the six causes of action raised by Ps in the pleadings:

(a) Breach of the oral agency agreement in failing to ensure quality of the defective iGoals;

(b) Alternatively, breach of an agreement between the 1st Plaintiff and Defendant as the principal manufacturer in failing to ensure quality of the defective iGoals;

(c)  Breach of the oral agency agreement in failing to obtain the best manufacturing price – which requires the Court to make a factual determination of what is the best manufacturing price that could have been obtained and what would be excessive in comparison;

(d) Breach of fiduciary duty as an agent by colluding with the PRC factories to earn secret profits – a very serious allegation of wrongdoing which could affect the Defendant’s business reputation and standing;

(e) Conversion of the moulds which were created for the manufacturing of the iGoals; and

(f) A claim for disclosure of the Defendant’s books, records, and accounts arising out of the incidence of the agency relationship between the 1st Plaintiff and the Defendant – this involves considerations as to principles of agency law, to what extent and in what circumstances an agent would have to disclose its own documents to the principal.[3]

9.  D further summarized the characteristics of the present case include: -

(a) A claim involving 6 causes of action seeking a monetary award of at least HK$40 million;

(b) Complex legal issues (involving identifying the precise terms of oral agreement, estoppel, and agency law) and factual issues, with a serious allegation made, requiring the statement of claim to be settled by senior and experienced counsel;

(c) The complexity of the factual dispute being illustrated in particular by 82 total pages of pleadings, 17 lever arch files of documents, 6 total witnesses, and a 66 page expert report;

(d) A reasonably estimated 12-day trial length, which would justify instructing senior counsel to attend trial;

(e) Over 3 years being required to get to the current pre-witness statement stage, with 3 still outstanding interlocutory applications by the Plaintiffs concerning pre-witness statement matters.[4]

10.  There is no dispute over the above analysis by Ps.  This means that the arguments in the trial will be over the factual issues of the oral agreement and the practices over the time between the parties, unlike Ps’ submissions in paragraph 9 that the crux boils down to legal issues.

THE ASSESSMENT

Senior counsel

11.  No doubt, the court has the discretion to determine the quantum for the security, taking all the circumstances into account.  Wing Hing Provision, Wine & Spirit Trading Co. Ltd v Hanjin Shipping Co Ltd [1998] 4 HKC 461 at 464A-F.

12.  Ps submit that the crux of the dispute boils down to legal issues revolving around the laws of agency, breach of contract, and defective goods and 2 counsel or senior counsel is unnecessary for trial and one senior junior will be more than qualified to conduct the trial.  This is a subjective opinion without taking into consideration the allegation of dishonesty and the amount involved.  Such subjective opinion does not warrant much weight.

Length of trial

13.  By parity of reason, the same analogy applies to the estimated length of the trial.  The Court will give due consideration to the parties’ estimation of the length of the trial.  They are in the best positions to make the estimate themselves and the court should rely upon their honesty in their estimation.  D’s estimate is 12 days’ trial whilst Ps consider 7 days will be sufficient.  Without going deep into the substance of the evidence, I consider that 12 days should be reserved for the trial, especially where there will be factual issues and expert evidence to be given by Ps for the trial.  In fact, Ps also submit that they have to amend the pleadings, which may complicate the issues.  The interlocutory applications and the consequential procedures will escalate the costs as well.

Mediation

14.  Ps have also complained that D had unreasonably refused to attempt mediation with them.[5]

15.  Ps ask this Court to take into consideration settlement by mediation, which is one of the underlying objectives under Order 1A, r.1(e), RHC.

16.  This morning, D has indicated that it agreed mediation upon condition that Ps should bear the costs of mediation.  This is not the norm of mediation, the costs of which are usually shared by the parties.  The court will not impose any conditions on any parties for mediation because this is very much a consensual activity.  However, when it comes to consider the reasons for one party’s refusal of mediation, it is entitled to take this factor into consideration.  This condition is, no doubt, an impediment to mediation.  The Court will encourage the parties to take a more pragmatic approach towards mediation.

17.  Ps also submit that to order them to pay hefty sum into court before mediation will give D an upper hand in mediation.  D argues that if Ps say that this will weaken their position or stifle their claims, they have the burden of proof, which they have failed to put to the Court. It is only common sense that the amount of costs to be paid into court will cause pressure on Ps, which the Court will also take into account in its determination of the fair way of dealing with this application.

18.  Where the pleadings are in the course of being amended, it will be difficult for the parties to mediate the terms for settlement as they are not in a position to gauge their positions in the legal proceedings.  The position will be clear after finalization of the pleadings and the exchange of the witness statements, though this is by no means a hard and fast rule.

Further security up to the stage of PTR

19.  In the circumstances, I shall consider ordering the security for costs up to the stage of Pre- trial Review, which should take place after close of pleadings and presumably after mediation if the parties are serious about it.

20.  The amount of security is assessed on the basis that there will be amendments to the pleadings and further interlocutory applications. According to the draft bill for this application, the costs up to May 2015, including disbursements are about $443,000; and the costs from 28 May 2015 to October 2015 are about $124,000.  The total amount up to now is about $570,000, excluding the costs for today’s hearing.  This is on top of the security for costs of $750,000 already depleted before May 2015. The estimated costs for the trial are about $4,000,000.

21.  In view of the pending applications for amendment and other interlocutory applications up to the stage of Pre-trial Review and the costs of preparing the witness statements, I estimate the costs will be $1,200,000, which should be sufficient to cover the costs for mediation as well.

Mode of payment

22.  As to the mode of payment, I do not accept the proposals of payments by installments as this is not provided for in Order 23 and such proposal will inevitably incur more costs and time for the parties and the court.  If Ps say that such costs paid in one lump sum will stifle their legitimate claims against D, it is incumbent upon them to prove their case in accordance with the decided authorities.  As to the mode of bank guarantee, which D opposes, the reasonable approach will be for Ps to make the proposal with the terms of the guarantee, such as the bank and the conditions upon which the guarantee is to be provided to D.  If D objects to such terms, the Court will determine on them at the hearing.  Otherwise, there will be further dispute over the terms of the guarantee between the parties.  The Court will have to deal with them subsequent to the hearing, incurring more costs and time too.  Since Ps have not been able to put before me the proposed guarantee for consideration, their proposal is refused.

23.  For the reasons above, I shall make the order of further security for costs in the sum of $1,200,000 up to but exclusive of the Pre-trial Review to be paid into court within14 days from the date hereof, with liberty to apply.  Further proceedings shall be stayed until payment of the said sum into court.  If the parties are unable to reach settlement through mediation and the matter has to go through trial and D would ask for further security for costs, the parties should first sit together to reach an agreement on the costs for the trial without coming back to court for argument.  By this time, the costs can be assessed much easier.

COSTS AND ORDER

24.  As to the costs of this application, O.62, r.3 RHC provides that the costs should follow the event and this is the basis on which D asks for the costs for today’s hearing.  This begs the question what the event is for this hearing. D’s application for the security for costs for the whole trial has been rejected for the reasons stated above.  On the other hand, Ps’ suggestion that $1.2 million should cover the trial and the modes of payment by installments or bank guarantee have also be rejected by this Court for the reasons above.  In the circumstances, the proper costs should be the costs in the cause (with counsel’s certificate for today’s hearing), having taking into account of the factors stipulated under O.62, r.5 of RHC.  So I order.

25.  I shall now make an order in terms as follows:

(a) Security for costs in terms of paragraph 23 above;

(b) (Costs in terms of paragraph 24 above.

HCA 223/2013

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

HIGH COURT ACTION NO 223 OF 2013

_________________________

_________________________

_____________

D E C I S I O N

_____________

THE APPLICATION

1. This is the plaintiffs’ application for discovery pursuant to O.24, rr. 3 & 7 RHC for the defendant to make specific discovery by :

a.  serving an affidavit stating whether it has or has at any time had in its possession, custody or power any documents in the classes specified in the Schedule attached to the summons and if the documents or any of them have been but are not now in possession, custody or power, stating when it parted with the same and what has become of the same;

b.  inspection by the plaintiffs of those documents;

c.  filing and serving a further and better list of documents relating to the classes of documents in the Schedule; and/or

d.  making an affidavit verifying the list of documents filed by the defendant.

2. The plaintiffs submit that they would also rely upon rule 10 as the defendant has, in the Amended Defence at paragraphs 57 and 58 agreed to compile and produce and disclose such accounts and documents to the 1^st plaintiff insofar as the defendant is able to do so.  This will not prevent the defendant from arguing its case today.

3. There are six categories of document in the Schedule.  Category one is agreed by the defendant.  The disputed categories are:

Category 2:   the underlying documents relating to the entries in the defendant’s accounting ledgers regarding KLGZ, Inside Kay-El LLC, Premier and VHR Investments Limited in respect of the iGoal business, and the annual reports of KLHK/REP;

Category 3:   contractual documents and correspondence relating to orders, price, negotiations, quality control, payment, title, defects and rework costs between the defendant, the PRC factories and Global Air relating to iGoal business;

Category 4: documents relating to the finance facilities allegedly provided under the MOU referred to in paragraph 33.2.5 of the Amended Defence, underlying documents for the trust receipt and loans made in connection with iGoal business including loans to Global Air;

Category 5: records of (a) quality control records and inspection, including procedure manual, inspection reports, production records and inspection records; and (b) the technical changes or improvements made to the iGoals; and

Category 6: emails referred to in document D330 and bank statements corresponding to defendant’s ledgers.

4. In gist, the defendant opposes this application on the ground that the plaintiffs intend to fish for further materials in a desperate attempt to rectify the defective case they have pleaded.”[1]  These grounds will be examined below.

FACTUAL BACKGROUND

5. This matter had come before me on the plaintiffs’ application for leave to adduce expert evidence and I had given my Decision on 18 November 2014.  I shall refer to the factual background as set out in my previous Decision, supplemented by the factual issues as raised by the defendant in the written submissions.

6. Mr. Thomas Caswell, a director and shareholder of the 1^st plaintiff, was the inventor of a portable inflatable goal known as the “iGoal”.

7. Between August and November 2006 the 1^st plaintiff and the defendant had orally agreed (“the Agency Agreement”) that the defendant was appointed agent of the 1^st plaintiff for the purposes of, inter alia, identifying potentially suitable manufacturers of the iGoal and ensuring that the manufacturer had suitable quality control and other processes in place, so as to ensure that the iGoals were manufactured satisfactorily.  The defendant would receive a commission of 10% of the value of the orders placed by the 1^st plaintiff.

8. The 1^st plaintiff had purchased 30,000 iGoals under two sales contracts.  The 1^st plaintiff alleged that 60% of the goods under the respective sales contracts were found defective.  The defects of the iGoals under the first sales contract are that the iGoals were poorly assembled and air leaked from the plastic joints at the corners and the handle on the pumps supplied as part of the iGoal were weak or had fractures and they snapped during normal usage.  The defects of the iGoals under the second contract are that there were leakages at the corners by reason of excessive compression in the manufacturing causing the plastic to crack and on certain of the iGoals, the nets were fitted either too tightly or too loosely.

9. The 1^st plaintiff alleged that the defects were caused by breach by the defendant of the Agency Agreement for failing to take reasonable steps to ensure good quality of the iGoals manufactured by the manufacturer and to ensure that the manufacturer had the suitable quality control procedures for good quality in accordance with the 1^st plaintiff’s requirements.

10. Alternatively, the 1^st plaintiff pleaded that it purchased the iGoals from the defendant direct and the defendant had been in breach of the implied terms of merchantable quality for the iGoals under section 16 of the Sale of Goods Ordinance, Cap. 26.

11. The defendant denies liability on the grounds that firstly, it made no admission to the defects; it was informed that only some of the products had defects; secondly, it was only responsible to cause the manufacturer as chosen by the 1^st plaintiff to manufacture the iGoals, following the directions of the 1^st plaintiff or Mr. Caswell.  Since Mr. Caswell was responsible to test and approve the quality of the iGoals, the defendant is not liable for the defects as identified.  The defendant also denied that it was the principal seller of the iGoal products.[2]

12. The plaintiffs also allege that the defendant (as the plaintiffs’ agent) failed to identify a manufacturer who could produce the iGoal products at the “best price reasonably obtainable”[3].

13. The plaintiffs also plead that the Defendant was in a position of conflict in that it had a financial interest in the manufacturer in Mainland China and has made secret profit from its position as the 1^st plaintiff’s agent[4].

14. The defendant denies all these allegations.[5]

The issues in dispute

15. The plaintiffs have identified the issues in dispute as whether the defendant

“(a) was a seller of (defective) iGoals to the 1^st Plaintiff, or alternatively acted as agent for the 1^st Plaintiff in respect of those sales contracts (Paragraphs 15 to 34 of the SOC [8-13];

(b) breached its agency duties to the 1^st Plaintiff, in particular, by failing to secure the reasonably best possible prices for iGoals and ensuring adequate quality control during the iGoal manufacturing process, (Paragraphs 35 to 38 of the SOC [13-14]);

(c) had financial interests which conflicted with its fiduciary duties (as agent) to the 1^st Plaintiff (Paragaphs 39 to 41 of the SOC [15-16]; and

(d) made secret profits from its agency for the 1^st Plaintiff (Paragaphs 39 to 41 of the SOC [15-16]).”[6]

16. The defendant has no quarrel with the plaintiffs over the above issues in dispute.  It reminds this Court that in the context of discovery, the relevance of an issue could not be dictated by a party unilaterally placing it in its pleadings (see Allington Investments Corp & Ors v First Pacific Bancshares Holdings Ltd & Anor [1995] 2 HKC 139, 144G-H; Chinacast Education Corporation & Ors v Chan Tze Ngon [2014] 5 HKC 277, 298D para. 40c).  In Allington the Court of Appeal had held: “Even if the opposing party has failed to apply to strike out an irrelevant allegation in the pleadings of the other side, he is not barred from taking the point in an application for specific discovery that the allegation made in the pleadings is irrelevant to the subject matter of the action and ought to be disregarded for the purpose of discovery.  The court is certainly not bound to take account of any immaterial or irrelevant averment of fact improperly inserted into the pleadings by a party.”  Hence, in the present case, the substance of the pleaded issues has to be examined.[7]

17. The defendant also emphasizes that the scope of the proposed discovery is too wide and not precise, referring to Fuji Photo Film Co Ltd v Carr’s Paper Ltd [1989] RPC 713, 715, lines 20-35; Re Estate of Ng Chan Wah, deceased, (unrep. HCAP 5/2003, Chu J (as she then was), 5 March 2003).  On this ground alone, as the defendant submits, this application should be dismissed.[8]

18. Finally, the defendant submits that this Court should give effect to the underlying objectives of the rules and procedures and has a residual discretion to define the scope of discovery on the basis of necessity and proportionality (see Billion Lead Investment Limited v Union Joyce Limited, HCMP 2145/2011, unrep., 14 December 2012, Mimmie Chan J, para. 16 and Man Mi Sang v Man Shek Tong, unrep., HCA 881/2012, 24 October 2014, Registrar Lung).

19. The plaintiffs have no dispute with the above legal principles applicable to this application. Bearing in mind of those legal principles, I shall now discuss the categories of documents in dispute in this application.

DISCUSSION

20. It is trite law that the burden is on the plaintiffs to make out a prima facie case:

(a)  that there is in existence a specified document or class of documents;

(b)  that the party against whom the order is sought has or had the document in his possession, custody or power;

(c)  that the document or class of documents relates to a matter in question in the action; and

(d)  that discovery thereof is necessary either for disposing fairly of the cause or matter or for saving costs.

See paragraph 11 of Deak and Company (Far East) Ltd. v N.M. Rothschild and Sons Limited & Others CA [1981] HKC 78

Category 2

21. The defendant opposes this category on the following grounds[9]:

a.  The plaintiffs have not justified their relevance and necessity;

b.  On the allegation of conflict, the plaintiff’s case is based upon “a most obscure and empty allegation that D “had some financial interest in the factory” and made “secret profits from its position as [P1’s agent]” without any particulars at all in support (see SOC, para. 39 [A/15]).”

c.  It is a fishing expedition as the facts pleaded in §40 of the Statement of Claim do not give rise of any inference to be drawn for secret profit;

d.  The names of the companies were not pleaded in the Statement of Claim; and

e.  Plaintiffs ask for all “the underlying documents relating to the entries in the Defendant’s accounting ledgers” in respect of those companies without identifying the proper scope of documents sought.

22. It must be right that the court is not bound by the irrelevant reference in the pleadings and can refuse to make an order of discovery.  Although the defendant has not applied to strike out the plaintiffs’ allegation, which is irrelevant to the main issue, the court has the discretion not to order discovery.  Allington Investments Corp & Ors.

23. However, this matter has developed to a stage where not only the impugned pleadings had not been struck out, the defendant had provided ledgers, which made reference to these companies.  The principles in Peruvian Guano case will come into play. It is difficult to say that the exercise is fishing because the defendant had prepared the ledgers, making reference to the companies.  The plaintiffs have, in Mr. Rose’s 2^nd affidavit, said that the defendant’s accounting ledgers related to the 1^st plaintiff[10], which was not refuted by the defendant.[11]

24. As to the proper scope of documents sought, they are related to the 1^st plaintiff.  As such, the scope is defined and is not oppressive.

25. This category should be allowed.

Category 3

26. The defendant complains that it had already supplied many documents to the plaintiffs relating to Global Air’s involvement.[12]  The plaintiffs have also explained the reasons why they are suspicious of Global Air’s involvement in Mr. Rose’s 2^nd affidavit.[13]  Those reasons are supportive of the plaintiffs’ allegations of the defendant having been in breach of fiduciary duty as an agent for the 1^st plaintiff.  It is true that there is no definition of “the best price” in the pleadings or the affidavit.  But in principle, the agent is under a duty to obtain the best price for its principal.  What is the best price must depend on the market condition or circumstances relevant to the product or commercial reality prevalent at the material time.  It requires the defendant to carry out certain consideration of those commercial circumstances before coming to a decision of the fair price for the product.  The plaintiffs are not asking for documents relating to the potential manufacturers.  This term is not stated in category 3.  As to the complaint that the name of Global Air was not mentioned in the pleadings, it has to be borne in mind that the court does not apply the legal principles in a mechanistic manner.  Rather, it applies the legal principles in accordance with the different circumstances relating to the matters in dispute for the administration of justice between the parties in accordance with the authorities.

27. Relevance must be defined “by reference to the plaintiffs’ pleaded claim in its general sense, as distinct from its detailed exposition and by the defendants’ pleaded defence in the sense of its general refutation of the plaintiffs’ claim.  What matters for discovery purposes is the claim and defence to it in the broadest sense and not to the detailed particulars of either claim or defence.” by Deputy High Court Judge H Wong SC in Chan Hung v Yung Kwong Chung (unrep. HCA 216 & 217/2004) At paragraph 27 of the judgment, the Deputy Judge further said: “With respect, I agree with Colman J.  For the purpose of discovery, the relevance of a document should not be solely tested against the detailed particulars pleaded by the parties.  It is the pleaded case of the parties in the broad sense that one should be concerned with.  A document may be generally relevant to a party’s case as pleaded (many so-called “background documents” are of this nature) although its relevance cannot be specifically pinned to some pleaded particulars.  For discovery purpose, the pleadings have to be looked at broadly.”, which was adopted in Billion Lead Investment Ltd.

28. Adopting the above approach, it is difficult to say that the plaintiffs are oppressive in asking for the documents relating to Global Air in view of the plaintiff’s explanation mentioned above.

29. The defendant argues that it had disclosed the relevant documents.  However, it can be observed that the documents it mentioned in the affidavit of Mr. Mahtani do not match all the documents in category 3.  The defendant is required to make an affidavit whether it had disclosed all those documents; or if any of those documents are not in its possession, custody or power, it can put the facts in his affidavit.

30. This category is relevant for the fair disposal of the issues in disputes between the parties and they should be disclosed by the defendant.

Category 4

31. The defendant agrees to either disclose the documents relating to the finance facilities provided under the MOU referred to in paragraph 33.2.5 of the Amended Defence by way of a supplemental list of documents or make an affirmation confirming if such documents are in the possession, custody or power of it.  The dispute is therefore only over all “underlying documents” for the trust receipt and loans provided.  The defendant argues that first, the plaintiffs’ case on agency is wholly inconsistent with their case that the defendant was the direct seller of the products; second, it is incumbent upon the plaintiffs to establish that the alleged trust receipts and loans related to the products in question.[14]

32. On the issue of pleadings, it seems that the plaintiffs are quite entitled to plead the alternative claims in the Statement of Claim.  See O.18, r.12A.  If the defendant intends to take issue on the pleadings, this issue should have been raised before discovery.  On the face of it, it seems that it is inconsistent for the plaintiffs to plead that the defendant was, at the material times, an agent on the one hand, and a seller of the iGoals to them on the other.

33. However, one must look at the facts of this matter as pleaded in the pleadings. The plaintiffs pleaded that the defendant was their agent.  But they also pleaded in paragraph 1 of the Statement of Claim that the defendant “KL” at all material times carried on business as a supplier of various goods, and also as an agent for persons wishing to acquire goods. (emphasis added)  To this pleaded issue, the defendant in its Amended Defence did not specifically deny the alleged capacities.[15]

34. The plaintiffs pleaded in paragraph 19 of the Statement of Claim that the defendant sold the iGoals to the plaintiffs in the alternative claim.  The defendant made a general denial of paragraph 19 in its Amended Defence.  See paragraph 24.  By paragraph 30 of the Statement of Claim, the plaintiffs alleged that the defendant sold the iGoals to the 1^st plaintiff in the course of business, to which, the defendant denied specifically that it had done so in the course of its business. See paragraph 36.  However, it further pleaded defence to the plaintiffs’ alternative claim as if it were the seller, relying on s.16(3) of the Sale of Goods Ordinance, an alternative defence to the alternative claim.[16]

35. It is therefore apparent that the defendant did have a dual capacity in its business, viz. as a dealer and an agent.  Whether the defendant at the material times acted as pure agent for the 1^st plaintiff or alternatively as the seller of the iGoals as alleged by the plaintiffs remains a live issue for the trial.

36. The plaintiffs explain the reasons for the trust receipts financing relating to the sale and purchase of iGoals and the underlying documents in Mr. Rose’s 2^nd affidavit.[17]  The defendant’s affidavit in response [129-130] at paragraphs 35-38 has not been able to say why the plaintiffs’ concern that the trust receipts would throw light on the true ownership of the iGoals is unnecessary.  This morning, I have been shown samples of those trust receipts, which do not bear the relationship of the defendant with the 1^st plaintiff, nor do they show the capacity of the defendant in relation to the goods pledged to the banks.  It is, of course, possible that the defendant allowed the bank to take title of the goods as the agent for the 1^st plaintiff.  However, it is uncertain whether the defendant had to disclose its capacity as the agent for the 1^st plaintiff and that it had to disclose its principal in the trust receipts.  The terms of the trust receipts will be evidence to show the true position of the defendant in relation to the iGoals.  Since the capacity of the defendant in the sale of the iGoals to the 1^st plaintiff is a live issue, the trust receipts and the underlying documents appear to be required for a fair trial of this issue.  The defendant had already disclosed the trust receipt loan advices to it from BNP Paribas and UCO bank for the payment of invoices and bills of exchange,[18] it will not be oppressive for the defendant to disclose the underlying documents in support of the loans for the iGoals only.

37. This category is allowed.

Category 5

38. The defendant does not dispute the existence of these records but has filed evidence that:-

“ (1) All the processes regarding quality control and inspection were conducted at the PRC factories and all the records were at all material times and are still kept there. The documents are therefore not in the possession, custody or power of D (see Mahtani’s 2^nd Aff, para. 39 [A/132]).

(2) D is not in possession, custody or power of any documents concerning technical changes or improvements made to the iGoal products save and except those sent by Paul Wang to P1 and D (which have all been disclosed) (see Mahtani’s 2^nd Aff, para. 40 [A/133]).”[19]

39. I tend to agree with the defendant that the plaintiffs’ assertion that the defendant may be in de facto control of the Second Factory by reference to the correspondence and the court documents it had recently obtained from the Second Factory is speculative in light of the defendant’s affidavit by Mr. Mahtani that the defendant no longer had the documents.  In the matter of Prudential Enterprise, Ltd. (unreported, HCCW594/1999 Chu J. 24 October 2003) at paragraph 16 said that challenge to the affidavit of documents made under O.24, r.10 could only be made “if it can be shown by admissions in pleadings or the contents of the affidavit itself or documents referred thereto that the affidavit is insufficient: Jones v Monte Video Co. (1880) 5 QBD 556 at 558.”  At §18 of the judgment it was held:

“… …At this interlocutory stage, this affidavit has to be accepted as conclusive, and the petitioners cannot seek to challenge or contradict it.”

DHCJ M. Ng in her Decision in Lee Sai Nam v Li Shu Chung & Ors (unreported, HCA 1711/2009, 10 January 2014), at §§55-57 had added another two factors, viz.(i) any other source that constitutes an admission of the existence of a discoverable document not so far discovered; (ii) an apparent exclusion of documents from discovery by a party under a misconception of the case.

In interlocutory proceedings, no mini-trial is necessary.  The court is required to come to a conclusion on the material before it.  Liaoyang Shunfeng Iron and Steel Company Limited (遼陽順鋒鋼鐵有限公司) & Another v Yeung Tsz Wang (楊梓鈜) & Another (unrep. CACV 234/2011 Hartmann JA 14 June 2012 §107).

40. The plaintiffs are unable to show any of the factors as stated in Chu J’s decision.  Mr. Rose for the plaintiffs has, however, referred to the correspondence between himself and Mr. Wang and Mr. Mahtani in relation to the daily production records and the procedures manual.[20]  Mr. Mahtani had dealt with those documents in his 2^nd affidavit.[21]  To resolve such discrepancies, a mini-trial may be necessary, which is not permitted. Liaoyang Shunfeng Iron and Steel Company Limited.

41. The plaintiffs argue that the defendant had not deposed as to when it had parted with the documents required and what had become of them. This has to be on the basis that the defendant had possession, custody or power of those documents.  The defendant has not said it had those documents.  It was given access to the documents when it was necessary to do so.  Mr. Mahtaini’s affidavits have dealt with the documents already.

42. As such, Mr. Mahtani’s affidavit is final. This category is dismissed.

Category 6

43. This category is relatively less controversial.

44. The defendant agrees to disclose the emails referred to in document D330 or make an affirmation to confirm if they are in its possession, power or custody (see Mahtani’s 3^rd Aff, para 6).

45. As confirmed by the defendant, the above should cover the documents specified in paragraph 44 of Mr. Rose’s 2^nd affidavit.

46. Mr. Rose complains that the defendant has not disclosed “all the defendant’s bank statements for the corresponding entries in its accounting ledgers, for example, cheques and remittance advices.[22]

47. The defendant argues that the plaintiffs are under a burden to specify the particular bank statements they need and to establish that such bank statements are relevant to any of the material issues and are necessary.  This must be the position, following the decision of the Court of Appeal in Deak and Company (Far East) Ltd.  The plaintiffs have not been able to tell why all the bank statements are relevant to the issues in dispute.  They fail to narrow down the issues for discovery, which would amount to a fishing exercise. See paragraph 9 of Mariner International Hotels Ltd. v Atlas Ltd. & Another (unreported, HCA10714/1998, 10752/1998 & 10821/1998 Burrell J. 18 January 2002)

48. This category is partly conceded by the defendant.  Other than those conceded, the plaintiffs should also be entitled to those documents as set out in paragraph 44 of Mr. Rose’s 2^nd affidavit.  The rest of this category is dismissed.

CONCLUSION, COSTS AND ORDER

49. As a conclusion, category 1 is conceded, categories 2, 3 and 4 are successful.  Category 5 is dismissed. Category 6 is partly successful as specified under paragraph 46 above.

50. As to the costs of this application, the costs should follow the event, with counsel certificate, to be assessed under O.62, r.9A.  Taking into account of the outcome of this application, the plaintiffs should have 65% of the costs, assessed at $115,000 x 65%=$74,750, to be paid by the defendant to the plaintiffs within 14 days from the date hereof.

51. I shall now make an order in terms as follows:

a.  As per paragraph 49, supra;

b.  Costs of this application be as per paragraph 50, supra.

CASE MANAGEMENT

52. Time for the defendant to comply with the order for discovery be 28 days from the date hereof.

53. Time for the plaintiffs to serve the expert report be extended for 56 days from 20 April 2015 and the time for the defendant to serve the expert report in reply will be extended accordingly.

54. Liberty to apply.

55. The Case Management Conference fixed for 10 June 2015 be varied to a date to be notified by the Registrar to the parties.

56. Costs of this case management be in the course. (15 min.)

HCA 223/2013

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 223 OF 2013

____________________

____________________

_______________

J U D G M E N T

_______________

1. This is an appeal against the decision of Master K W Lung of 18 November 2014 whereby he gave leave to the plaintiffs to adduce expert evidence by way of a report from an expert on the matters set out in schedule 2, items 1 to 5 inclusive, of the plaintiffs’ amended summons applying for such leave.

2. The master’s decision is admirably and comprehensively set out, if I may say so, in his reasons for his decision.  I shall adopt both the matrix of his decision and his reasoning in this short judgment.

3. The plaintiffs’ claim against the defendant is essentially that the latter, whether as agent or principal, supplied goods, for which the 1st plaintiff paid, which were defective in material respects and therefore not of merchantable quality.  Those defects are sufficiently pleaded in the Statement of Claim.  They indicate to me that they simply reflect the conclusions of an expert from his examination of the material.

4. There are other aspects of the plaintiffs’ claim with which I do not need to be concerned.  Both the Statement of Claim and the Defence are unjustifiably prolix and repetitive and ought to have crystallised the essential background, allegations and issue in a more digestible and economic form. 

5. It is, however, patently obvious that the crux of the cause of action is whether the goods supplied were defective and whether proper quality control had been exercised.  The Defence specifically avers that no admissions are made to these allegations.  I do not need to go beyond that in highlighting the relevant issues for the purposes of this appeal.

6. I have, of course, in mind the time-honoured and wholly realistic guidance in relation to the admissibility of expert evidence and the authorities in support.  These are clearly set out in Master Lung’s decision and it is unnecessary for me to repeat them.

7. It is clear beyond question, in my view, that the plaintiff needs, and is entitled to call, expert evidence to lay the foundation at trial for his case.  Without it, he would be putting a significant, if not impossible, burden upon the judge to decide whether the allegations are made out, viz whether the plastic panels of the I-goals were likely to crack; the nets were fitted too tightly or too loosely; the compression required to push the hose into the connector was too great; and whether the quality control tests were properly carried out. 

8. This is clearly one of those cases in which a judge needs expert evidence, even if he has to decide between conflicting experts.  Any argument that the costs incurred thereby are significant or wasteful is without justification.  If the expert evidence is essential, the question of cost effectiveness or proportionality does not arise.

9. The remainder of the defendant’s arguments against the admission of expert evidence loses sight of the fact that the matter of whether the products were defective and whether there was or was not quality control to be exercised by the defendant are central to this action.  I do not need to rehearse those arguments or repeat the counter-arguments ad nauseam.

10. Accordingly, I confirm the master’s decision and I dismiss this appeal with costs.

HCA 223/2013

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

HIGH COURT ACTION NO 223 OF 2013
________________________

_____________

D E C I S I O N

_____________

The application

1. By summons dated 26 May 2014, the plaintiffs apply under O.38, r.36 RHC for leave to adduce expert evidence on the issues set out in Schedule 1 of the summons in terms set out in Schedule 2 of the summons.

2. The defendant opposes this application.

3. The parties are legally represented.[1]

The factual background

4. For the present application, the relevant facts of the matter are these.

5. Mr. Thomas Caswell, a director and shareholder of the 1^st plaintiff, was the inventor of a portable inflatable goal known as the “iGoal”.

6. Between August and November 2006 the 1^st plaintiff and the defendant had orally agreed (“the Agency Agreement”) that the defendant was appointed agent of the 1^st plaintiff for the purposes of, inter alia, identifying potentially suitable manufacturers of the iGoal and ensuring that the manufacturer had suitable quality control and other processes in place, so as to ensure that the iGoals were manufactured satisfactorily.  The defendant would receive a commission of 10% of the value of the orders placed by the 1^st plaintiff.[2]

7. The 1^st plaintiff had purchased 30,000 iGoals under two sales contracts.  The 1^st plaintiff alleged that 60% of the goods under the respective sales contracts were found defective.  The defects of the iGoals under the first sales contract are that the iGoals were poorly assembled and air leaked from the plastic joints at the corners and the handle on the pumps supplied as part of the iGoal were weak or had fractures and they snapped during normal usage.[3]  The defects of the iGoals under the second contract are that there were leakages at the corners by reason of excessive compression in the manufacturing causing the plastic to crack and on certain of the iGoals, the nets were fitted either too tightly or too loosely.[4]

8. The 1^st plaintiff alleged that the defects were caused by breach by the defendant of the Agency Agreement for failing to take reasonable steps to ensure good quality of the iGoals manufactured by the manufacturer and to ensure that the manufacturer had the suitable quality control procedures for good quality in accordance with the 1^st plaintiff’s requirements.[5]

9. Alternatively, the 1^st plaintiff pleaded that it purchased the iGoals from the defendant direct and the defendant had been in breach of the implied terms of merchantable quality for the iGoals under section 16 of the Sale of Goods Ordinance, Cap. 26.[6]

10. The defendant denies liability on the grounds that first, it made no admission to the defects; it was informed that only some of the products had defects; secondly, it was only responsible to cause the manufacturer as chosen by the 1^st plaintiff to manufacture the iGoals, following the directions of the 1^st plaintiff or Mr. Caswell.  Since Mr. Caswell was responsible to test and approve the quality of the iGoals, the defendant is not liable for the defects as identified.[7]

11. The defendant has also pleaded that the 1^st plaintiff and the defendant had, by way of a memorandum of understanding dated 16 May 2009, fully and finally settled their dispute in relation to all the potentially defective iGoals ordered under the two sales contracts.  However, this is disputed by the 1^st plaintiff in its Reply.[8]  The disputes will involve factual findings, which should not be resolved in this hearing.

The relevant legal principles

12. Those legal principles that I had set out in my previous Decision in Leung Siu v Bank of China (Hong Kong) Limited (unreported, HCA1911/2012, 7 March 2014) are applicable in the discussion that follows:

a. Under Order 38 rule 36 of RHC, unless the parties agree, no expert evidence may be adduced at the trial without leave of court.  See Fung Chun Man v Hospital Authority (unreported, HCPI 1113/2006 by Bharwaney J on 24 June 2011);

b. The court is concerned with proper directions for expert evidence in order not to cause delay and waste of expenses.  Faith Bright Development Limited v Ng Kwok Kuen [2010] 5 HKLRD 425 at 430-431;

c. Where the proposed expert evidence is plainly inadmissible or irrelevant, the court will refuse admission of such evidence.  If the court cannot form a clear view on the relevance or the evidence is clearly relevant, it should grant leave for the evidence to be adduced at the trial.  The evidence is relevant if it is helpful to the court in arriving at its decision on one or more of the issues to be resolved.  Wong Hoi Fung v American International Assurance Company (Bermuda) Limited & Shrila Chan [2002] 3 HKLRD 507;

d. However, evidence meeting the test could still be excluded if the court took the view that calling it would not be helpful to the court in resolving any issue in the case justly. Such evidence would not be helpful where the issue to be decided was one of law or was otherwise one on which the court was able to come to a fully informed decision without hearing such evidence.  Barings plc (in liquidation) and another v Coopers & Lybrand (a firm) and others Barings Futures (Singapore) Pte Lye (in liquidation) v Mattar and others [2001] All ER (D) 110 by Evans-Lombe J.

e. When there is a dispute over whether expert evidence should be adduced at trial, the court has to examine the pleadings to determine whether the proposed expert evidence is required in the pleaded case.  Yeung Ga Wai v Lau Ming Shum (unreported, HCA798/2004, 19 July 2012; the burden of establishing relevance is on the applicant, at §7 of Majorette Hong Kong Ltd v Fullmore Corporation Ltd (unreported, HCA1583/2008, 23 June 2010);

f. Expert evidence must be confined to the live issues of dispute between the parties, which must be sought from the pleadings China Gold Finance Limited v CIL Holdings Limited & Ors (unreported, HCA2900/2001, 25 September 2012, at para. 17-18.)

g. It will be helpful to bear in mind the factors of real issues of dispute between the parties; the burden of proof; fair trial and proportionality for the determination of the scope of expert evidence.  See paragraph 10 of Pak Ko Batteries Factory Ltd & Others v New Leader Battery Industry Ltd (unreported, HCA1139/2007, 14 January 2014).

13. Mr. Chan for the defendant further relies on Fung Chun Man v Hospital Authority & Another (unreported, HCPI 1113/2006 by Bharwaney J., 24 June 2011) in which the learned judge said that “the expert evidence must be in a recognized discipline, reasonably required to enable the court to resolve the issues in dispute, and proportionate.”  He also emphasized in deciding whether expert evidence should be allowed, the court “must have regard to other relevant circumstances..… to ensure cost effectiveness and economy, expedition, proportionality, and fairness between the parties….. the court strives to ensure a level playing field with fair access to proper experts for all parties.”[9]

Discussion

14. With the above legal principles in mind, I shall now discuss the plaintiffs’ application.

15. Mr. Chan is of the view that the expert evidence addresses the following issues, viz:

a. First, whether the iGoals supplied under the sales contracts were defective as the plaintiffs have pleaded.

b. Second, (a) what would have constituted reasonable quality control procedures for the production of iGoals and (b) whether those procedures would have identified the alleged defects in the iGoals.[10]

16. Mr. Chan takes the view that for the expert evidence under 15.a above, the 1^st plaintiff’s application should not be allowed on the basis that it would not be cost effective or proportionate to allow parties to spend extra (and considerable) costs on obtaining expert evidence, having regard to the key issues of dispute between the parties.  His arguments run as follows.

17. The question of whether or not the iGoals acquired by the 1^st plaintiff were defective as alleged in the Statement of Claim is a question of fact which could be dealt with adequately by the respective parties’ factual witnesses.  He points out that iGoal was a new invention of Mr. Caswell of the 1^st plaintiff and someone from the manufacturer, who produced the iGoals that are the subject of the plaintiffs’ complaint, would be best placed to assist the court on this factual question by reference to the 1^st plaintiff’s “requirements”.

18. The main issue at trial is unlikely to be whether or not the iGoals in question were defective. Instead, the likely key issue is going to be whether or not the extent of the defendant’s duty owed to the 1^st plaintiff included the duty to underwrite the quality of iGoals manufactured by the 1^st plaintiff’s chosen manufacturer to the satisfaction or in accordance with the 1^st plaintiff’s requirements.  This is particularly so given that (a) the defendant has made no admission to the plaintiffs’ allegation that the iGoals in question were defective and (b) the pleadings indicate there is evidence that appears to suggest it is common ground that some of the iGoals sold under the sales contracts were defective.

19. On the issue whether 60% of the iGoals were defective, the burden of proof lies on the 1^st plaintiff as the defendant has made no admission.  If the defendant’s proposal is adopted by calling a factual witness of the manufacturer to give evidence, this witness’s evidence can only be on the facts of the matter, that is, on the appearance of the products.  He cannot give evidence on the technical aspects in the manufacturing of the products, which will be within the province of an expert.  The 1^stplaintiff has pleaded its case, not only on the basis that the defendant had to ensure the quality and the quality control procedures of the manufacturer in paragraph 5, but also the particulars of the quality control measure as pleaded in paragraph 23(d) of the Statement of Claim.  It has also identified the causes of the defects in the pleadings.  It will be beyond the factual witness’s ability to give evidence on the causes of the defects as identified by the 1^st plaintiff.  Although Mr. Chan submits that the factual witness’s opinion can be admissible evidence under section 58(2) of the Evidence Ordinance, Cap.8, his opinion is only relevant to the facts he perceives, but cannot go to the extent as to whether the force of compression was too excessive, or whether the handle will snap under normal usage.  In the circumstances, I consider that it is reasonable for the 1^st plaintiff to call an expert to give evidence on the issues of whether the iGoals were defective, which are covered by paragraphs 1 and 2 of Schedule 1 of the summons.

20. As to the second group of expert evidence under paragraph 15.b supra, the issue that the defendant is under an obligation to underwrite the quality of the iGoals under the Agency Agreement is in dispute.  It is a question of factual finding by the trial judge.  Of course, if the court finds that the defendant does not have such contractual obligation, the 1^st plaintiff’s proposed expert evidence will not be necessary.  However, unless there is clear evidence that the 1^st plaintiff would not succeed on this factual issue, this Court should proceed on the basis that the 1^st plaintiff has a reasonable chance of success in proving its case at trial.  In such circumstances, I do not support Mr. Chan’s argument that paragraph 3 in Schedule 1 on whether any adequate system of quality control would have involved at least the procedures, processes and test set out in the “Igoal Inspection Operation Sheet” (“the IOS”) as pleaded in paragraph 23 (d) of the Statement of Claim is irrelevant for the fair resolution of the issues in dispute.  The defendant admitted that it would only be responsible to cause the manufacturer as chosen by the 1^st plaintiff to manufacture the iGoals, following the directions of the 1^st plaintiff or Mr. Caswell.  See paragraph 10 supra.  The IOS was provided by the 1^st plaintiff to the defendant as pleaded in paragraph 23 of the Statement of Claim.  The plaintiff has to prove the requirements under the IOS would be effective to control the quality of the iGoal.  The defendant also complains that the scope is too wide.  As I understand it, the plaintiffs’ case is that defects were discovered prior to the IOS.  If the 1^st plaintiff succeeds in proving the defendant’s contractual obligation to underwrite the quality and the quality control system of the manufacturer, the 1^st plaintiff has to prove the quality control system prior to the IOS as well.

21. The above reasons support paragraphs 4 and 5 of Schedule 1.

22. However, I agree with Mr. Chan that paragraph 6 of Schedule 1 is not necessary for the trial of this matter. The implied duty of merchantable quality of goods sold has nothing to do with the quality control procedures for the production of the goods.  The Court will only be concerned with whether the goods are of merchantable quality.  It does not have to investigate into the cause of any failure of merchantable quality.  It may be due to the quality control, or it may be due to other reasons as well.  But this is irrelevant for the trial.

23. I allow the expert evidence as per Schedule 1 of the summons, except paragraph 6 of it.

24. As to Schedule 2 of the summons, the defendant disagrees that expert evidence should be given for the fair resolution of the dispute.  The defendant also confirms that the defendant intends not to give expert evidence at the trial.  In the circumstances, the Court has no power to force it to give expert evidence at the trial as Ribeiro J. (as he then was) held in his Decision in Yee Tung Fibre Glass Manufactory Eng. Co (a firm) v FRP (Hong Kong) Limited (unreported, HCA17840/1998, 17 September 1999 at page 7):

“In Derby & Co. Ltd. v Weldon (No. 9) The Times, November 9 1990 (Dillon, Ralph Gibson and Staughton, L.JJ.), the English Court of Appeal held that in principle, the court had no power to order a party to litigation to disclose expert evidence on an issue on which that party did not intend to adduce evidence at the trial. .. What the Rules now provide for is machinery requiring, as a condition of a party being able to adduce expert evidence at a trial, that it should previously have served on the other party a statement of the substance of such evidence.  The Rules do not override the prima facie privileged status of the document, nor do the Rules (or any inherent jurisdiction) provide the court with power “to call for the bringing into being and disclosure of expert evidence on an issue which the party did not intend to adduce evidence on at the trial.”

25. Under those circumstances, the proper directions should be similar to those that I had given in Amcor Packaging (Asia) Pty Ltd v Li Wei Po (unreported, HCA1351/2009, 9 January 2014) that the 1^st plaintiff be given leave to adduce expert evidence, with liberty to the defendant to respond to it and finally the 1^st plaintiff will have the liberty to reply.  The directions will be as follows:

a. Leave to the plaintiffs to adduce expert evidence as per paragraphs 1-5 of Schedule 1 of the summons; the expert report shall be served on the defendant within 56 days from the date hereof;

b. The defendant be at liberty to serve its expert report in response thereto within 42 days thereafter; and

c. The plaintiffs be at liberty to serve the expert report in reply within 28 days thereafter.

26. As to the costs of this application and the hearing today, the costs should follow the event.  Since the plaintiffs have lost one item in Schedule 1, 90% of the costs for the application and the costs of the hearing today (with a counsel certificate) be to the plaintiffs.  I have noted that Mr. Chan has asked me to reserve the costs to the trial judge.  This should not be the practice because the trial judge should not be bothered with what happen today. Under O.62, r.9A of RHC, the Court has the power to have a summary assessment of the costs, which I now do.  The costs are summarily assessed at $96,000 (being 90% of the assessed costs) to be paid by the defendant to the plaintiffs within 14 days from the date hereof.