BRUCE JAMES STINSON (Plaintiff) v GU MING GAO (Defendant)

CACV 61/2017

[2018] HKCA 10

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 61 OF 2017

(ON APPEAL FROM HCA NO 2352 OF 2012)

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J U D G M E N T

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Hon Kwan JA (giving the judgment of the Court):

1.  This is an interlocutory appeal against the judgment of Deputy High Court Judge Kwok, SC given on 15 June 2016 in which he dealt with two summonses issued by the plaintiff and a summons issued by the defendant. On 24 February 2017, the Court of Appeal (Lam VP and Kwan JA) granted leave to appeal to the plaintiff on four of the grounds in the draft notice of appeal and refused leave for the remaining five grounds[1]. Leave to appeal was given in relation to the following: (1) the refusal of leave to amend the statement of claim; (2) the refusal to give leave to adduce expert evidence; (3) the refusal to make an unless order; and (4) the dismissal of the discovery application made in the alternative.

Background

2.  We will first relate the background matters relevant to the disposition of this appeal.

(a) The dispute in outline

3.  The defendant is a university professor in statistics.  He entered into a partnership with the plaintiff by an agreement dated 27 January 2004 (“the Agreement”) to establish and operate a horse racing betting operation using mathematical and/or statistical models which provided accurate probability estimates for Hong Kong horse races.  From 2004 to 2007, the mathematical model did not prove to be profitable in the way originally envisaged but in 2007, the defendant and the modelling team under his management were finally able to develop a mathematical model which worked consistently and yielded consistent winnings for the partnership.  The plaintiff alleged that from at least the start of the racing season of 2011/2012, the defendant converted the mathematical model of the partnership to his own use by placing bets on his own.  The defendant terminated the partnership by notice dated 27 July 2012.

4.  The plaintiff issued the writ in this action on 19 December 2012, claiming a declaration that the mathematical model developed pursuant to the Agreement belongs to the partnership; an injunction to restrain the defendant, whether by himself, his servants or agents, from using or dealing with the model save for the operation and benefit of the partnership; an order for delivery up by the defendant to the plaintiff of a current working version of the model; damages for breach of the Agreement; an account of all profits made by the defendant from horse racing betting using the model on his own account; and an order for payment of all sums found due on taking the account.

5.  The defendant filed a defence and counterclaim in which he denied that he converted the model to his own use.  He alleged that the plaintiff failed to manage the partnership business competently in breach of his duties under the Agreement and refused to pay to him the modelling team’s gross profit sharing entitlement for the racing season of 2011/2012.

6.  The defendant does not deny he had been making private bets.  The dispute is whether he did so with the use of the mathematical model of the partnership (which the defendant claims is based on a logit model) or, as alleged by him, with a different model which he had researched and developed on his own (which he claims is based on a probit model).

(b) The orders for discovery

7.  It is necessary to set out in some detail the plaintiff’s previous application for production for inspection of the mathematical model of the partnership and the actual terms of the orders made by Master de Souza on 27 November 2013 (“the Discovery Order”) as varied by L Chan J on 2 April 2014 (“the Varied Discovery Order”).

8.  By the plaintiff’s summons issued on 19 September 2013 and amended on 14 November 2013, the plaintiff sought, among other things, an order that the defendant do produce for inspection the documents referred to in paragraph 8 of the defence and counterclaim, which contains an averment that the mathematical model of the partnership comprises four discrete elements, being:

“(a) A statistical model using mathematical concepts and language and reduced to a series of written mathematical formulae.

(b) A variables generation program (together with written operating instructions) written in the publicly available “MatLab” software capable of receiving Hong Kong Jockey Club and “RaceMate” data feed and converting such data into a series of specific race meeting variables.

(c) A computer values program written in the publicly available “Excel” software (together with written description of and series of commands used) capable of converting specific race meeting variables into numerical values to be assigned to each of the horses listed to start in each race meeting.

(d) Written formulae enabling such numerical values to be represented as probability estimates for each of the four bet types: Win, Place, Quinella and Quinella Place.”

9.  By paragraph 1 of the Discovery Order, the defendant was ordered to “produce for inspection by the plaintiff and his solicitors at the office of the defendant’s solicitors” the documents referred to in paragraph 8 of the defence and counterclaim as listed in (a) to (d) above, and “permit the plaintiff and/or his solicitors and/or agents to peruse the documents so produced, and to make notes of their contents”.  By paragraph 3, the defendant was ordered to “supply the plaintiff with copies of the documents referred to in paragraphs 1 and 2 herein on payment of reasonable charges”.

10.  The defendant appealed against the Discovery Order and this was heard by L Chan J on 1 April 2014.  The judge handed down his decision the following day dismissing the appeal.  He rejected the defendant’s submission if the plaintiff should be given possession of the mathematical model of the partnership, the plaintiff would exploit it for his own use, saying this was an “unsupported attack on the good faith of the plaintiff”[2].  It was acknowledged by the defendant that “one major issue between the parties is whether the defendant had used the model in his private betting”.  The plaintiff submitted before L Chan J that it is necessary to have “possession and use” of the model and “delivery up of the model is important”, as “the defendant intends to engage an expert to study the contents of the model and the defendant’s private bets to see if the bets were placed with the benefit of the output of the model”.  The judge took the view the plaintiff’s stance is reasonable and “it is necessary to have the model delivered up by the defendant to the plaintiff”.  He also expressed the view there should not be “any condition to be imposed on the plaintiff for the model to be delivered to him unless the defendant be subject to the same.”[3]

11.  L Chan J noted in his decision that at the end of the hearing, the parties had jointly proposed they would work out an undertaking for the custody of the model in the event the court should dismiss the appeal.  The parties were not able to reach agreement on any undertaking by the time the decision was handed down.

12.  In paragraph 2 of the Varied Discovery Order, L Chan J varied the Discovery Order in that the mathematical model referred to in paragraph 1 of the Discovery Order “shall include all versions of the model and its discrete elements developed by the defendant and/or the modelling team working under the defendant from time to time up to the date of delivery up”.

(c) The defendant’s variation summons

13.  Again, it is necessary to set out in some detail what was sought in the summons issued by the defendant just two days after the Varied Discovery Order was made to vary that order (“the defendant’s Variation Summons”).

14.  The defendant’s Variation Summons sought an order that the Varied Discovery Order “be varied or corrected as set out in the annexure enclosed herein or as per any revisions thereto”.  According to the marginal note of the summons, it was made under the slip rule provision in Order 20 rule 11 and the inherent jurisdiction of the court.  At the hearing of the summons before L Chan J on 15 April 2014, the defendant’s leading counsel, Ms Winnie Tam, SC, also invoked Order 24 rule 17, which provides that any order made under Order 24 may, on sufficient cause being shown, be revoked or varied.

15.  The annexure to the defendant’s Variation Summons is a five‑page document.  Among other things, it sought to replace those parts of the Discovery Order and the Varied Discovery Order requiring production of the mathematical model of the partnership which shall include all versions of the model and its discrete elements with a series of undertakings to be given by the defendant.  The pertinent undertakings are in these terms:

“(A)  To deliver identical copies of the following (hereafter called “the Models”) to the parties’ respective Solicitors …

(1)  a copy of the Mathematical Model referred to in Paragraph 8 of the Defence and Counterclaim dated 18 February 2013 (“the Mathematical Model”), comprising [the discrete elements (a) to (d) as set out above]; and

(2)  a copy of each and every other mathematical model derived from and/or developed from the Mathematical Model, if any, as well as each and every current and previous version of the Mathematical Model developed from 2004 to the date of the delivery (“the Other Mathematical Models”);

as are in his possession, power, custody or control.

(B)  To delete each and every copy of the Models, being the items set out in (A)(1) and (A)(2) of his undertaking herein, as are in his possession, power, custody or control.”

16.  L Chan J dismissed the defendant’s Variation Summons at the conclusion of the hearing on 15 April 2014.  He said this in his decision:

“8. The order suggested by Ms Tam this morning is a wholesale replacement of my order as it imposes stringent conditions on the custody of and access to the model to be kept by the solicitors for the parties. I cannot accede to this draft order because it is outside the scope of Order 20 rule 11. Nor can I accede to the application under Order 24 rule 17, because if the Defendant was minded to rely on this rule, it should have made it plain to the Plaintiff. The application on the basis of this rule should have been a fresh one. I also do not accept the submission that my inherent jurisdiction would include the force and effect of this rule.

9. On these grounds, I dismiss the application, but without prejudice to the Defendant making a fresh application by relying on Order 24, rule 17.”

(d) What the defendant did subsequently

17.  After the dismissal of the defendant’s Variation Summons, the defendant did not make a fresh application pursuant to Order 24, rule 17 to vary the Discovery Order and the Varied Discovery Order.

18.  He explained what he did subsequently in his 9^th affirmation filed on 28 August 2015:

“46. I have duly complied with the [Varied Discovery Order]. …

(1) Following the handing down of the Decision [on 2 April 2014] and the making of the [Varied Discovery Order], I took steps to locate, duplicate and disclose the Documents Ordered to be Produced[4].

(2) The discovery exercise was labour intensive. A total of more than 14,000 separate individual documents were included in two identical USB portable thumb drives (the “USB Drives”) one of which was provided to the Plaintiff’s solicitors. …

47. In light of the indications made by Mr Justice L Chan that both parties were to be subject to the same restrictions of access to the Partnership Model (such that neither of the Plaintiff nor myself is able to bet using the Partnership Model), I made two copy-protected copies of the Partnership Model (i.e. the probability model defined in paragraph 8 of the Defence and Counterclaim) using the Kaka Software with its default permission setting and saved those copies onto two USB Drives. As I have explained …, those copies were the only two copies of the only version of the Partnership Model that I had in my possession and I have not removed or deleted from the Partnership Model I retained any elements or any other file or component of the Partnership Model. I provided the two USB drives to my solicitors and erased the copy of the Partnership Model that was stored on my computer hard disk. My solicitors provided one of the USB drives to the Plaintiff’s solicitors and I instructed my solicitors to retain the other USB for safe keeping. The reason for my encryption and deletion of my version of the Partnership Model was because I believed that, as per the intention of Mr Justice L Chan mentioned above, both parties should be placed on equal footing to prevent any unauthorised use or duplication of the model until the determination of this action. …”

(e) The plaintiff’s summons

19.  The plaintiff’s experts, William Ziemba and Alan Wagner, have perused and studied the contents of the USB drive provided to his solicitors.

20.  Mr Wagner deposed that the encryption of the files and data in the USB drive “makes it virtually impossible for one to use the Model to generate bets, not to mention betting patterns”, so he has not been able to compare the betting patterns generated by the model contained in the USB with the betting patterns as shown in the defendant’s betting records, which the plaintiff has obtained[5].

21.  Mr Ziemba[6] and Mr Wagner[7] came to the conclusion that certain discrete elements are missing from the USB which should form part of the model that ought to have been produced by the defendant (“Ziemba’s Discrete Elements”), namely:

“(a) a final odds prediction program (the “Final Odds Prediction program”);

(b) a Betting Strategy, including the system of mixing public and model odds and for combining and placing bets (the “Betting Strategy”);

(c) documents comprising and/or describing the formulae, descriptions and explanations of the factors of the Model;

(d) source codes and executable programs for building all elements of the Model;

(e) documents comprising the explanations, descriptions, instructions in respect of the flow of data and/or the connections between the data input and output regarding the Model.”

22.  On 27 November 2014, the plaintiff issued a summons which was heard by Deputy High Court Judge Kwok, SC with two other summonses over four days in December 2015 and February 2016, resulting in the judgment under appeal.  Of relevance to this appeal are these four types of relief sought in the November 2014 summons:

(1)  leave to amend the statement of claim (paragraph 1 of the plaintiff’s summons)

23.  The amendments were to add after “the Mathematical Model” where these words appeared in various places the words “and/or a mathematical model/mathematical models derived and/or developed from the Mathematical Model”.

(2)  leave to adduce expert evidence (paragraphs 2 to 5)

24.  The issue on which leave to adduce expert evidence was sought was “whether the Defendant has used the mathematical model (the “Model”) referred to in Paragraph 4(b) of the Statement of Claim, and/or a mathematical model(s) derived and/or developed from the Model, for placing his own private bets on his own account.”

(3)  an unless order (paragraph 7)

25.  The plaintiff sought an order that the defence be struck out and judgment be entered in his favour, unless the defendant within seven days from the date of the order to be made produce for inspection, and supply the plaintiff with:

“(a)  a clean, unencrypted copy of the Model (which the Defendant was obliged to produce for inspection under Paragraph 1 of the [Discovery Order], and Paragraph 2 of the [Varied Discovery Order]), which is capable of being executed on a computer and being studied, analyzed and verified; and

(b)  the following documents comprising [Ziemba’s Discrete Elements].”

(4)  an order for discovery (paragraph 8)

26.  This was sought in the alternative to an unless order to produce for inspection and supply the plaintiff with Ziemba’s Discrete Elements.  Instead, the plaintiff sought an order that the defendant do within seven days from the date of the order to be made:

“(a) make an affidavit stating whether any document specified or described in [Ziemba’s Discrete Elements] has at any time been, in his possession, custody or power, and if not then in his possession, custody or power when he parted with it and what has become of it; and

(b) produce for inspection by the Plaintiff and his solicitors and/or his agents the documents in the possession, custody or power of the Defendant disclosed pursuant to the order to be made under sub-paragraph (a) above.”

27.  The judge refused all four types of relief sought, hence this appeal.

28.  We are mindful that these are case management decisions.  So to succeed, the plaintiff would need to show that the judge has gone clearly wrong and made orders which will clearly involve an injustice or an inability for the trial court to carry out its task, or if the judge has erred in principle or the order was irrational having regard to the issues that had to be resolved.  The appeal court will not interfere with the judge’s exercise of discretion unless he has misunderstood the law or the evidence or the exercise of his discretion was plainly wrong such that it was outside the generous ambit within which a reasonable disagreement is possible (Wong Kar Gee Mimi v Severn Villa Ltd [2012] 1 HKLRD 887 at §31).

Leave to amend the statement of claim

29.  The judge refused leave to amend the statement of claim for two main reasons.

30.  First, he held that the amendments fall foul of Order 18 rule 15(2), which provides that a statement of claim must not contain any allegation or claim in respect of a cause of action unless that cause of action is mentioned in the writ or arises from facts which are the same as, or include or form part of, facts giving rise to a cause of action so mentioned.  He took the view the amendments go beyond the claims in the endorsement of claim, which do not cover a model “derived or developed from the Mathematical Model”.  We agree with the plaintiff’s leading counsel, Mr John Yan, SC, the proposed amendments do not fall foul of Order 18 rule 15(2).  They are in respect of the cause of action in the writ of summons or arise from facts which give rise to the cause of action so mentioned, namely, the defendant’s breach of the Agreement.  The latter part of Order 18 rule 15(2) provides that subject to the prohibition against introducing a cause of action not mentioned in the writ, “a plaintiff may in his statement of claim alter, modify or extend any claim made by him in the endorsement of the writ without amending the endorsement.”  Ms Tam did not seek to support this reason on appeal.

31.  Second, the judge took the view that a model “derived … from the Mathematical Model” does not come within clause 15 of the Agreement, which provided that “the mathematical model, betting software, and their continuing development are considered to belong to the business”.  He accepted Ms Tam’s submission that the Agreement covers only one model, as continually developed, whether by way of improvements or modifications, and that there is still one model after each updating, fine tuning or continuing development.  He held that clause 15 covers the mathematical model, not a derivative product, and, in any event, the term “derived from” is lacking in precision.

32.  It is not necessary to consider the second reason because on appeal, the plaintiff has changed the amendments sought by dropping the words “derived from”.  The present proposed amendments read: “and/or a mathematical model/mathematical models improved, modified and/or developed from the Mathematical Model”.  Essentially, they track the wording in clauses 2 and 15 of the Agreement[8].

33.  In the circumstances, we need to exercise the discretion afresh.

34.  Ms Tam repeated her submissions in the court below that the Agreement would cover one and only one mathematical model and versions of the same model, not different models.  She had suggested before the judge that the amendments should read instead “any version of the Mathematical Model which is improved, modified or developed from the Mathematical Model”.  She further submitted that leave to amend should be refused on the ground of lateness, as the application was made years after the action was ready to proceed to trial, and that the amendments are of doubtful soundness, and would give rise to other disputes that are difficult to resolve and lead to further interlocutory activity, given that the scope for discovery, factual evidence and expert evidence would be expanded.  The defendant has obtained expert opinion to the effect that it is possible for two different probability models to produce similar betting predictions, and the fact that the defendant’s betting records may contain similar bets and results as those in the partnership betting records does not demonstrate that the same probability model was used by the defendant and the partnership[9].  The plaintiff should not be allowed to move the goal posts five years after the writ was issued in December 2012.

35.  The principles in Ketteman v Hansel Properties Ltd [1987] AC 189 at 212F to H remain good law.  Amendments should in general be allowed if they are necessary to enable real questions and controversy between the parties to be decided, provided they will not prejudice the other party and if any prejudice can be compensated by an order as to costs.  The court now also takes into account the underlying objectives in Order 1A of the Rules of the High Court, and would balance all relevant factors to decide how its discretion should be exercised, if the application is made in circumstances offending the underlying objectives (Topwell Corporation Ltd v Kwan Kam Kee [2014] 5 HKLRD 1 at §39).

36.  Mr Yan submitted it is just a question of semantics whether the word “model” or “version” is used, it does not really matter whether one calls it a version or a model that is improved, modified and/or developed from the partnership model. In any event, the plaintiff’s case that the Agreement prohibits any use by the defendant of any model which is improved, modified and/or developed from the partnership model is clearly arguable and is not bound to fail.  The construction of the Agreement is a matter for the trial judge.  The burden is on the party opposing the amendment to show prejudice (Re Playmates Investments Ltd [1996] 4 HKC 577 at 584C to E).  And there is no evidence that the defendant would suffer prejudice which cannot be compensated by costs.

37.  It is a drastic measure to preclude the plaintiff from amending the statement of claim to plead a case which closely tracked the wording of the relevant provisions in the Agreement.  This should only be done in plain cases (Natamon Protpakorn v Citibank NA [2009] 1 HKLRD 455 at §26).  We are not persuaded here the discretion should be exercised against granting the amendments.  Balancing all the relevant factors urged upon us, we come down firmly in favour of the plaintiff.  We would exercise our discretion to grant leave so that the plaintiff’s revised pleading as per the amendments sought in the notice of appeal would be permitted the opportunity of detailed consideration at trial.  We make an order in terms of paragraph 2 of the orders sought in the notice of appeal, and we direct the plaintiff to file and serve an amended statement of claim within 14 days of the handing down of this judgment.

Leave to adduce expert evidence

38.  No order granting leave to adduce expert evidence has hitherto been made.  This case clearly requires the input of expert witnesses in computer science and statistical theory and methods.  The judge refused leave to adduce expert evidence solely because he had refused leave to amend the statement of claim, so no evidence on a “non-issue” should be permitted.  As we have decided to grant leave to amend the statement of claim, we also need to exercise the discretion afresh whether to allow expert evidence be adduced.

39.  In the notice of appeal, leave is sought to adduce expert evidence:

“(a) On the issue of whether the Defendant has used the mathematical model (the “Mathematical Model”) referred to in Paragraph 4(b) of the Statement of Claim, and/or a mathematical model(s) improved, modified and/or developed from the Model, for placing his own private bets (the “Main Issue”); and

(b) On the issue of whether the Mathematical Model was a Logit or a Probit Model (the “Subsidiary Issue”).”

40.  The plaintiff also seeks leave for the parties to each appoint a maximum of two experts in relation to the Main Issue and the Subsidiary Issue.

41.  The two issues as defined were clearly raised by the parties.

42.  Ms Tam candidly acknowledged she has no substantive objection but opposed the application to adduce expert evidence nonetheless as the directions sought in the notice of appeal for leave to adduce expert evidence are the same as those sought in the plaintiff’s summons dated 14 December 2015 which was dismissed by the judge on 15 June 2016, and leave to appeal against such dismissal was refused by this court on 24 February 2017.  She also opposed the direction for the parties to each appoint a maximum of two experts.

43.  We do not think the wide power of this court is restricted by such technicality.  There is now a change of circumstances as we have decided to grant leave to amend the statement of claim.  In light of this, leave to adduce expert evidence should be considered afresh.  It would be a total waste of time and costs to remit this application to the court below.  It is clearly appropriate to grant leave to adduce expert evidence on the two issues as defined and that each party should be at liberty to appoint a maximum of two experts.  We will make an order in terms of paragraphs 3 to 5 of the orders sought in the notice of appeal.

Unless order to produce mathematical model

(a) The judgment below

44.  Mr Yan submitted below and on appeal that the purpose of seeking an unless order for production of a clean, unencrypted copy of the model is to compel compliance with the Varied Discovery Order, which the defendant has failed to comply with.  The judge refused to grant the order sought for two reasons.

45.  First, he was not satisfied it is necessary for disposing fairly of the cause or matter or for saving costs to order production of “a clean, unencrypted copy of the Mathematical Model which is capable of being executed on a computer and being studied, analysed and verified”.  Second, he took the view that the defendant’s contentions that the files and programmes contained in the USB drive are viewable, readable, analysable, and executable and that the reason why the Mathematical Model in the USB drive cannot be executed was due to the need to update the associated software (which are disputed by the plaintiff) are “plausible for interlocutory purposes” and it is not appropriate to conduct a trial on affidavits.

46.  As to the first reason, Mr Yan submitted that the judge had overlooked or misunderstood the nature and basis for seeking an unless order, which is to compel compliance with the Varied Discovery Order.  The fact that L Chan J had made this order cannot possibly be a basis for holding that the unless order sought is not necessary for disposing fairly of the cause or matter or for saving costs.  As for the second reason, Mr Yan submitted this again demonstrated the judge’s misunderstanding of the nature of the Varied Discovery Order and his failure to appreciate that the defendant had acted in flagrant breach and disobedience of the same.

47.  It does appear to us that the judge had not taken pertinent matters into consideration, namely, that the purpose of the application was to compel compliance with the Varied Discovery Order and whether the defendant had complied with the court order.  We therefore need to exercise the discretion anew.

(b) If there was compliance with the Varied Discovery Order

48.  The first matter we have to look into is whether there was compliance with the Varied Discovery Order, and the onus is on the plaintiff to establish there has been a failure to comply.

49.  Ms Tam submitted this is clearly not a case of total failure to comply.  She cited authorities in support of her contention that if the discovery is only regarded as incomplete, there is no default if discovery was made in “good faith” and was not “illusory” (Realkredit Danmark A/S & Anr v York Montague Ltd & Anr, 26 November 1998, English Court of Appeal, pp 4 to 5, per Tuckey LJ; Ka Wah Bank Ltd v Low Chung-song [1989] 1 HKLR 451 at 459B to 460B, per Fuad VP; Top Point Ltd v K & L Gates, HCA 1088/2011, 13 September 2016, §§28 to 33, per Lok J).

50.  Realkredit Danmark, Ka Wah Bank Ltd and Top Point Ltd are all concerned with the test for establishing whether there has been compliance with an unless order for discovery. In that kind of situation, the court is concerned that before the drastic consequence of an unless order is visited upon the offending party, it must be sure there has been a failure to comply with the order in question.  And it was held in Top Point Ltd that the issue of default of an unless order will turn upon whether the deadline has been met and not on the adequacy of compliance, unless it can be said that the compliance is not made in good faith or is illusory.  We are not concerned with that kind of situation and do not find the test for establishing failure to comply with an unless order helpful.

51.  The case of China Metal Recycling (Holdings) Ltd (In provisional liquidation) & Anr v Chun Chi Wai & Ors, HCA 1412/2013, 17 November 2014, cited by Ms Tam is more to the point.  There, Chow J was dealing with an application for an unless order to compel compliance with a previous order to make disclosure under certain Mareva injunctions.  In §34, Chow J expressed the view that in judging whether there has been a proper and sufficient compliance of the disclosure order, while it would not be appropriate to conduct a mini-trial on affidavit evidence, the court is entitled to consider whether the explanations of the parties making disclosure is “on its face credible and consistent with contemporaneous documents and/or their previous statements”.  We will adopt the same approach here.

52.  Ms Tam drew attention to the fact that in the Discovery Order, which required the defendant to “produce for inspection” the documents referred to in paragraph 8 of the defence and counterclaim, provision was made to permit the plaintiff to “peruse the documents so produced, and to make notes of their contents”, and the defendant was ordered to supply the plaintiff with “copies” of the same.  These provisions were not altered by the Varied Discovery Order.  She pointed out that the plaintiff did not seek or obtain orders specifying the extent to which he should have inspection of the electronic documents stored in a computer, such as by unrestricted access or the transfer of the electronic files or the reprogramming of files.  She contended that in the absence of an order for a specific mode of inspection, the defendant was entitled to provide inspection and supply copies in a manner which he, in good faith, saw fit, by making two encrypted copies of the mathematical model using the Kaka Software and saving them onto two USB drives, and then erasing the mathematical model that was stored in the hard disk of his computer.  The defendant asserted that the copies of the model in the USB drives were the exact copies of the only version of the mathematical model he had in his possession.

53.  The defendant adduced affirmations from two experts (Bai Zhaojun and Fan Jian Qing) to say that the copies in the USB drives can be read, viewed, executed, studied and analysed.  The encryption is merely to prevent the files to be copied to a separate storage device.  And even a complete copy of the latest partnership wagering system will not be workable or executable in the present operating environment without administering additional revisions and updates to the system, as there have been changes to the format and nature of the data provided by third party sources (the Hong Kong Jockey Club and RaceMate) that would render the probability model of the partnership wagering system incompatible.[10]  Ms Tam emphasised that the Varied Discovery Order does not require the defendant to supply to the plaintiff a working mathematical model that could generate betting estimates.

54.  It is clear to us that neither the Discovery Order nor the Varied Discovery Order would allow the defendant to produce for inspection only a copy of the mathematical model and not the original stored in his computer.  The fact that in addition to production of the model, the defendant was ordered to permit the plaintiff to make notes on inspection and to supply the plaintiff with copies is quite beside the point.

55.  We do not think the defendant could have been under any misapprehension of the obligation to produce the original for inspection.  He tried to latch on to the statement in L Chan J’s judgment that there should not be “any condition to be imposed on the plaintiff for the model to be delivered to him unless the defendant be subject to the same” as justification for the measures he took to impose restriction of access to the model he was to deliver to the plaintiff.  His explanation is not on its face credible when viewed against the contemporaneous events.

56.  The defendant’s variation summons was issued in an attempt to alter the Varied Discovery Order by replacing it with his undertakings to deliver two identical copies to the parties’ respective solicitors and to delete each and every copy of the model as are in his possession, power, custody or control. In dismissing that summons, L Chan J remarked that it was a “wholesale replacement” of the Varied Discovery Order and stated that the defendant should make a fresh application under Order 24 rule 17 for that purpose.  In making two encrypted copies and delivering one of them in a USB drive to the plaintiff’s solicitors and erasing the mathematical model stored in his computer hard disk, the defendant did what he had been told by the court he was not permitted to do without a fresh application and court order.

57.  The defendant must have known from the earlier judgment of L Chan J on 2 April 2014 (if not before) that the model to be produced for inspection would be used by the plaintiff’s expert to generate bets in order to compare the betting patterns so generated with the defendant’s betting records.  Quite clearly, the encryption of the copy was to prevent that from happening.  Even though the defendant was not ordered to produce for inspection a working model that could generate betting estimates, he was not permitted to encrypt what he was to produce for inspection.  We do not agree with Ms Tam that encryption of the copy is not against the spirit of the court orders.  What is more, the erasure of the model stored in the computer has made it impossible to check if the copies in the two USB drives are the exact copies of what was stored in the hard disk.  We do not accept the defendant could have been acting in good faith.  We reject the contention there was sufficient compliance of the Discovery Order and the Varied Discovery Order.  We hold that he has acted in flagrant breach of those court orders.

(c) If an unless order should be granted

58.  Ms Tam referred us to a judgment of the Singapore Court of Appeal in Mitora Pte Ltd v Agritrade International (Pte) Ltd [2013] 3 SLR 1179, which provided helpful guidance on the proper use of unless orders in §§42 to 47 after a review of the authorities.  The court emphasised that the immediate purpose of an unless order is “not to punish misconduct but to secure a fair trial in accordance with the due process of law” (§45), and stated that the draconian sanction of striking out a litigant’s claim or defence in its entirety should not be the default consequence of an unless order as it would effectively deprive the litigant of its substantive rights on account of a procedural fault (§46).  The guidelines for a “more calibrated use” of such orders are conveniently set out in §45:

“(a) “unless orders” stipulating the consequence of dismissal should not be given as a matter of course but as a last resort when the defaulter’s conduct is inexcusable;

(b) the conditions appended to “unless orders” should as far as possible be tailored to the prejudice which would be suffered should there be non-compliance; and

(c) other means of penalising contumelious or persistent breaches are available, including but not limited to

(i) awarding costs on an indemnity basis;

(ii) ordering the payment of the plaintiff’s claim or part thereof into court where the defaulting party is a defendant …;

(iii) striking out relevant portions of the defaulting party’s statement of claim or defence rather than the whole;

(iv) barring the defaulting party from adducing certain classes of evidence or calling related witnesses; and

(v) raising adverse inferences against the defaulting party at trial.”

59.  Part (a) of the unless order sought in paragraph 6 of the notice of appeal is for production for inspection within seven days “a clean, unencrypted copy of the Model (which the Defendant was obliged to produce for inspection under Paragraph 1 of the [Discovery Order], and Paragraph 2 of the [Varied Discovery Order]), which is capable of being executed on a computer and being studied, analyzed and verified”, failing which the defence be struck out and judgment be entered in favour of the plaintiff.

60.  In light of the guidance in the authorities cited, Mr Yan made two changes to the unless order sought.  He acknowledged that the Discovery Order and the Varied Discovery Order did not expressly provide for production of a working model that could generate betting estimates, so he would drop the part “which is capable of being executed on a computer and being studied, analyzed and verified” and merely seek a clean, unencrypted copy.  And he would not seek to strike out the entire pleading but only those parts of the defence which would have a bearing on the issue whether the defendant has used the partnership model and/or a model improved, modified or developed from it for placing his own private bets.

61.  Ms Tam submitted this is not a case where there was a history of failure to comply with court orders but only the first time when non-compliance was alleged against the defendant.  She contended that the unless order is wholly disproportionate to the limited benefit that the plaintiff would hope to obtain.  Even though the defendant has deposed that “it would require significant effort, on [his] part to reconstruct a fully operational model”[11], Ms Tam submitted this is not an admission that he is able to reconstruct the same model ordered to be produced under the Varied Discovery Order.  And, according to the defendant[12] and his expert Mr Fan[13], the reconstructed model will not be the same wagering system used by the partnership in the past, in light of the need to amend and update the software and links to third party sources, and any revision, update, change or modification of the partnership wagering system and its underlying probability model will affect the integrity of the model and the reliability of any output data produced.  Hence, a comparison of the defendant’s bets with the bets generated by a reconstructed model will yield less meaningful results than an empirical comparison of the defendant’s bets with the bets placed by the partnership.

62.  All in all, Ms Tam submitted it is pointless for the plaintiff to obtain a fully reconstructed wagering system in order to generate bets, and there are other ways for the plaintiff to prove his case, such as by the evidence of factual witnesses, by drawing inferences, and by studying and analysing the mathematical model in the encrypted copy provided.

63.  We do not accept Ms Tam’s submissions.  The fact that there is no history of disobedience of court orders counts for very little when there is flagrant breach of the orders for production, as we have found.  The starting point is that the plaintiff is clearly entitled under the court orders to have production for inspection a clean unencrypted model and should be supplied with a copy of the same, not an encrypted version.  This crucial piece of evidence to establish the main issue on liability has been erased deliberately.  The considerations urged upon us by Ms Tam (that the defendant has made no admission he is able to reconstruct a fully operational model, that the reconstructed model would not be the same model, and that the reconstruction of the model would affect its integrity and the reliability of the output data produced) pale into insignificance as they are all difficulties (if they are difficulties as contended) of the defendant’s own making, brought about by his disobedience of the court orders.  That there may be other ways for the plaintiff to prove his case is immaterial, as it has not been shown that the other ways are just as effective.

64.  We are satisfied this is an appropriate case for an unless order.  The defendant’s non-compliance with the court orders is not excusable.  An unless order should be made to redress the prejudice suffered by the plaintiff as a result and to secure a fair trial in accordance with the due process of law.  To quote Chadwick LJ in Arrow Nominees Inc & Anr v Blackledge & Ors [2000] CP Rep 59 at §54, the object of the rules as to discovery is to secure the fair trial of the action in accordance with the due process of the court.  Where a litigant’s conduct puts the fairness of the trial in jeopardy, such that any judgment in favour of that litigant would have to be regarded as unsafe, or where it amounts to such an abuse of process as to render further proceedings unsatisfactory and to prevent the court from doing justice, the court is entitled to refuse to allow that litigant to take further part in the proceedings.

65.  We would order the defendant to produce for inspection “a clean unencrypted copy of the Model (which he was obliged to produce for inspection under paragraph 1 of the Discovery Order and paragraph 2 of the Varied Discovery Order).”  As for the time limit to comply with this, we would allow within 28 days from the date of our order instead of seven days as sought by Mr Yan, noting that Ms Tam has declined to address the court on this despite our invitation.  We would tailor the conditions appended to the unless order to redress the prejudice, which must have an adverse impact on the plaintiff’s effort to establish his case that the defendant has used the partnership model, and/or a model improved, modified or developed from it, for placing his private bets.  We would order those portions of the defence relevant to this issue to be struck out in the event of failure to comply with the unless order.

66.  We have considered the submissions of Mr Yan and Ms Tam on those paragraphs of the defence that may be relevant to the above issue.  We would order the following parts of the defence to be struck out in the event of failure to comply with the unless order:

“13. The Defendant denies allegations at paragraph 7 of the Statement of Claim that he has in breach of Clause 15 of the Agreement and/or his duties arising out of his position as partner of the Partnership Business converted the Mathematical Model to his own use and thereby made profits for himself and not for the Partnership Business either without the consent of the Plaintiff or at all and puts the Plaintiff to strict proof thereof.”

“14. The Defendant avers that by email of 17 September 2011 the Defendant stated that the extent (if any) of his betting was not a matter for discussion and denies that his email constituted any admission that he was making bets using the Mathematical Model or at all.”

“16. The Defendant denies the allegation at Paragraph 9 of the Statement of Claim that he intends to continue the acts complained of and puts the Plaintiff to strict proof thereof.”

“17. The Defendant denies the allegations at Paragraph 10 of the Statement of Claim that the Plaintiff has suffered loss and damage by reason of the foregoing and will continue to suffer loss and damage and puts the Plaintiff to strict proof thereof.”

67.  The effect of striking out the above paragraphs is that the defendant will be debarred from contesting his liability to the plaintiff and the averment that the plaintiff has suffered loss and damage by reason of his breaches.  He is not precluded from contesting quantum, namely, the extent of the loss and damage alleged by the plaintiff to have sustained as a result of his breaches.

Unless order to produce discrete elements

68.  This may be dealt with shortly.  Mr Yan did not press for this strongly on appeal.

69.  By paragraph 1 of the Discovery Order, the defendant was ordered to produce for inspection the documents referred to in paragraph 8 of the defence and counterclaim, which comprised four discrete elements as pleaded.  Paragraph 2 of the Varied Discovery Order varied paragraph 1 of the Discovery Order to include “all versions of the model and its discrete elements developed by the defendant and/or the modelling team working under the defendant from time to time up to the date of delivery up.”

70.  The discrete elements sought to be produced in an unless order are Ziemba’s Discrete Elements and they comprise five elements. It is not entirely clear, on the available evidence, the extent to which Ziemba’s Discrete Elements may overlap with the four discrete elements pleaded in paragraph 8 of the defence and counterclaim.  In these circumstances, we do not think it appropriate to make an unless order for production of Ziemba’s Discrete Elements.

Discovery relating to the discrete elements

71.  In the alternative to an unless order for production of Ziemba’s Discrete Elements, the plaintiff seeks an order that the defendant do, within seven days from the date of the order to be made:

“(a) Make an affidavit stating whether any document specified or described in [Ziemba’s Discrete Elements] has at any time been, in his possession, custody or power, and if not then in his possession, custody or power when he parted with it and what has become of it; and

(b)     Produce for inspection by the Plaintiff and his solicitors and/or his agents the documents in the possession, custody or power of the Defendant disclosed pursuant to the order to be made under sub-paragraph (a) above.”

72.  This is the same as the order sought before the judge, but the judge simply dismissed the plaintiff’s summons of November 2014 without dealing with this alternative relief in paragraph 8 of the summons.

73.  The defendant agreed with Mr Ziemba that “there are other materials and elements other than the probability model are necessary to run a horse racing betting operation” and “these are in particular the elements for odds prediction and betting strategy”[14], namely, the first two of Ziemba’s Discrete Elements.  He referred to the witness statements of Lam Yuk Fai and Leung Man Kit filed on his behalf, which provided details on their involvement in preparing and running the odds prediction programme, which was used on the computers of the partnership.  He claimed he is not in possession of the odds prediction programme or the betting strategy and has no legal right to compel Lam Yuk Fai and Leung Man Kit to provide any document to the plaintiff[15].

74.  Mr Yan emphasised the close relationship of the defendant with Lam Yuk Fai and Leung Man Kit, who were members of the modelling team headed by him.  Lam Yuk Fai mentioned in his witness statement it was part of his responsibilities to work on final odds prediction by analysing historical odds once in every few months whenever he was instructed by the defendant[16]. Leung Man Kit stated that he downloaded raw racing data and attended to further processing of data, which, when combined with other data provided by the defendant, would produce probabilities for horses to win in the races[17].  Mr Yan submitted there is no mention by the defendant of his ever approaching Lam Yuk Fai or Leung Man Kit to ask them if they are in possession and control of the odds prediction programme or the betting strategy and whether they would disclose the same.

75.  In the defendant’s 9^th affirmation, he deposed that “some if not most of [Ziemba’s Discrete Elements] [namely, the last three elements] (e.g. formulae, descriptions and explanations) have already been provided to the Plaintiff”, that “[he does] not have possession, power or custody of any other document as described [in the last three elements”, that “none of the [first two elements, i.e. the Final Odds Prediction program and the Betting Strategy] form part of the “Mathematical Model” defined in paragraph 8 of [his] Defence and Counterclaim”, and that he verily believed that “none of the [first two elements] are in [his] possession, custody or power unless they are contained in the USB Drive.” [18]

76.  Ms Tam submitted the above assertions made by the defendant are conclusive.  We do not agree.  We do not think the vague and general assertions could be regarded as providing properly the information sought in paragraph (a) of the order, leaving aside whether they are credible or not.  And the obligation to produce for inspection is not discharged by just providing the USB drive to the plaintiff without identifying the relevant element or elements as may be stored in it.

77.  We would make an order in terms as sought in paragraph 7 in the notice of appeal, as well as the consequential order in paragraph 8, save that seven days as sought in these paragraphs would be altered to 28 days from the date of the order herein.

Order and costs

78.  For the above reasons, we allow the plaintiff’s appeal and make the orders relating to leave to amend the statement of claim, leave to adduce expert evidence, an unless order to produce a clean unencrypted copy of the mathematical model, and an order for discovery of Ziemba’s Discrete Elements, in the manner as indicated in the foregoing paragraphs of this judgment.

79.  We have not heard submissions on the costs below and on appeal.  The orders we make as to costs are nisi.

80.  On the costs before the judge, by the orders made on appeal, the plaintiff has succeeded on each of these four types of relief sought in his summons of November 2014.  We make an order that the defendant should pay the plaintiff the costs attributable to those parts of the summons, save that the plaintiff should pay the costs of and occasioned by the amendment of the statement of claim in any event but the costs of the hearing before the judge in respect of the amendment of pleading should be borne by the defendant.

81.  As for the costs of the appeal, we see no reason why costs should not follow the event.  We order the defendant to pay the plaintiff’s costs of this appeal, which would include two-thirds of the costs of the application for leave to appeal ordered by this court in February 2017 to be in the cause of the appeal.

82.  We grant a certificate for two counsel in respect of the costs below and on appeal.

83.  Any party wishing to vary the costs orders nisi should apply within 14 days of the handing down of this judgment.  This would be dealt with on paper.

Mr John Yan SC and Mr Dominic Pun, instructed by Lam, Lee & Lai, for the Plaintiff (Appellant)

Ms Winnie Tam SC and Mr Jason Yu, instructed by Baker & McKenzie, for the Defendant (Respondent)