To Yuk Fung v. Wu Pun Yan

HCA 644/2018

[2020] HKCFI 400

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 644 OF 2018

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D E C I S I O N

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A. This Appeal

1.At issue in this appeal is what should be the appropriate costs order in respect of an Order 14 application which the Plaintiff sought to withdraw before the substantive hearing.

2.This action, which was commenced on 21 March 2018, concerns a dispute arising from an agreement for transfer of shares entitled “股權轉讓契約”.  This agreement has been described by the parties as the Share Transfer Deed (“the Deed”), details of which will be set out below.  On 13 April 2018, the Plaintiff took out a summons (“the O.14 Summons”) and also filed an affirmation in support of her application for summary judgment (“the O.14 application”) in respect of her claim which arose from a dispute under the Deed.  Affirmations were subsequently filed on behalf of the Defendant in opposition to the O.14 application.

3.It is noteworthy that in the present case, notwithstanding the operation of Order 18 rule 2(2) whereby the time for filing the defence normally starts to run only after the summons for summary judgment has been determined, leave was given to the Defendant (upon his application) to file his Defence and Counterclaim after the O.14 application had been taken out.  On 9 July 2018, the Defendant filed his Defence and Counterclaim.

4.On 8 October 2018 (i.e. about 3 months after the filing of the Defence and Counterclaim and about one month before the substantive hearing of the O.14 application which had been fixed for 12 November 2018), the Plaintiff’s solicitors wrote to the Defendant’s solicitors acknowledging that the Defence and Counterclaim raised a factual dispute and proposing to withdraw the O.14 application with an order that costs of the application be in the cause.

5.By letter dated 12 October 2018, the Defendant’s solicitors replied by stating that they had no objection in principle to the Plaintiff withdrawing the O.14 application but they opposed the Plaintiff’s suggestion on costs for the following reason:

“We are of the view that since it was your client’s decision to file and serve a premature O.14 summons and supporting affirmation prior to reviewing our client’s Defence and Counterclaim, your client should have to bear the costs of the application now that she has had a change of heart upon reviewing the same. As such, we ask that your client do pay our client’s costs arising out of and incidental to the O.14 application forthwith, to be taxed if not agreed.”

6.Since the parties were unable to reach any agreement, the parties at the hearing on 12 November 2018 presented their arguments on costs before Master Grace Chan (“the Master”).   Having granted the Plaintiff leave to withdraw the O.14 Summons, the Master made an order (“the Costs Order”) that (1) costs of the O.14 Summons be in the cause, and (2) costs of the hearing (summarily assessed at $50,000) be paid by the Defendant to the Plaintiff forthwith.

7.The Defendant now appeals against the Costs Order.

B.  Background

8.The underlying transactions are by no means straightforward.

9.Skywalker Global Resources Company (PNG) Limited (“Skywalker PNG”) is a wholly owned subsidiary of Skywalker Global Resources Company Limited (“Skywalker HK”).  In late 2013, Skywalker PNG obtained from the Papua New Guinea Forest Authority (“PNGFA”) a right to carry out a large scale forest clearance (“the Licence”) for commercial, agricultural and other land use purposes in an area known as 26C of West Sepik Province, Papua New Guinea (“the NUKU Project”).

10.At all material times prior to 18 October 2016, the Plaintiff was the sole registered shareholder of Skywalker HK.

11.On 27 April 2015, the Plaintiff became a trustee in respect of 30% of her shares in Skywalker HK when such shares were settled on trust in favour of A.F. (PNG) Resources Limited (“AF(PNG)”). AF(PNG) was used as a corporate vehicle by the Defendant and other individuals – including one Zheng Yi Sheng Andy (“Zheng”) – to acquire shares in Skywalker HK from the Plaintiff.  By 1 September 2016, Zheng and the Defendant each held 50% of AF(PNG)’s shares.  As a result of these arrangements, the Defendant in effect held a 15% beneficial interest in Skywalker HK through AF(PNG).

12.On 1 September 2016, the Plaintiff and the Defendant entered into the Deed.  According to Recitals C, D, and Clause 1 of the Deed, the Plaintiff agreed to transfer to the Defendant or his nominated company, X. Gold Resources Limited (“X. Gold”):

(1) 36% of the shares in Skywalker HK and 36% of a shareholders’ loan owed by Skywalker HK to the Plaintiff (“the Shareholders’ Loan”) (collectively known as “the 36% Shareholdings”);

(2) Another 15% shares in Skywalker HK (“the 15% Shares”), being the shares held indirectly by the Defendant through AF(PNG);

(3) An additional 15% of the Shareholders’ Loan; and

(4) 50% of the logging rights in the NUKU Project (“the 50% logging rights”).

13.In total, 51% of the shares in Skywalker HK, amongst other rights, would be transferred to the Defendant.

14.It is noteworthy that Clause 1 of the Deed provides that it is an essential condition (“前提必要條件”) that both parties [i.e. the Plaintiff and the Defendant] shall perform their respective obligations set forth in the Deed before the intended transfer from the Plaintiff to the Defendant in respect of the 36% Shareholdings. Further, upon receipt of a Direction Notice from AF(PNG) to be provided by the Defendant, the 15% Shares and another 15% of the Shareholders’ Loan together with the 50% logging rights would be transferred to the Defendant or his nominated company upon completion.  In other words, there should be 2 parts of the transaction i.e. first, the transfer of the 36% Shareholdings and second, the transfer of the remaining 15% Shares plus 15% of the Shareholders’ Loan together with the 50% logging rights attached thereto.

15.Clause 2 provides that the consideration of the 36% Shareholdings would be either HK$30,000,000 or HK$36,000,000, depending on the operation of Clause 2(c) which will be explained below.  First, the payment of HK$30,000,000 shall be made by the Defendant to the Plaintiff as follows:

(1) Upon signing the Deed, the Defendant would pay the Plaintiff HK$3,600,000 as part payment of the consideration of the 36% Shareholdings.

(2) The balance in the sum of HK$26,400,000 would be paid by the Defendant upon X. Gold receiving 51% of the shares in Skywalker HK.

16.In the present case, there is no dispute that the sum of HK$30,000,000 has been paid by the Defendant pursuant to the Deed.

17.As to the difference in the sum of HK$6,000,000, i.e., the difference between HK$36,000,000 and HK$30,000,000 as mentioned above (“the Difference”), Clause 2(c) provides that it should be paid upon the occurrence of either of the following events (whichever is the earlier):

(1) Upon the issuance of a letter of undertaking by Zheng (i.e., another shareholder of AF(PNG)), to the Plaintiff confirming that he shall give up the 50% logging rights of the NUKU Project being held via AF(PNG), the Plaintiff would immediately assign the said 50% logging rights of the NUKU Project to the Defendant and the Difference would become payable at that time.

(2) If, within 6 months from the date of signing the Deed, AF(PNG) has not commenced any proceedings in Hong Kong against the Plaintiff in relation to the logging rights, then the Defendant shall pay the Difference on the first working day after 6 months from the date of the Deed.

(3) If AF(PNG) commences proceedings in Hong Kong within 6 months from the date of the Deed, the Defendant shall pay the Plaintiff the Difference within 3 business days after the Plaintiff wins the lawsuit for recovering the logging rights.

(4) Should the Plaintiff lose the lawsuit, the Defendant would not be required to pay the Difference.

18.Further, according to Clause 8 of the Deed, the Defendant agreed to pay the Plaintiff quarterly over a period of 10 years from 1 October 2017, by way of 40 instalments in total, a sum of HK$1,250,000 for each instalment on the first day of the first month of each of the instalments with the aggregate sum being HK$50,000,000 which has been described by the parties as the Later Stage Payments (“the Later Stage Payments”).

19.Clause 8, nevertheless, goes on to say that should the precondition of (or condition precedent to) completion (“the Condition Precedent”) as stipulated in Clause 3 not be met by the Plaintiff on or before 31 December 2016, the commencement date of the Later Stage Payments shall be deferred to the 10^th month after such precondition has been fulfilled by the Plaintiff.

20.According to Clause 3, the Condition Precedent is that Party A shall be responsible for interviewing with the officials of PNGFA in order to alleviate the risk of cancellation of the Licence.  The Plaintiff has also agreed that she would from time to time inform the Defendant of the progress in relation to the Condition Precedent including all relevant correspondence and documents relating to the same.

21.Further, Clause 3 provides that it is agreed between the parties that after the Plaintiff has obtained a letter from the officials of PNGFA (1) “confirming the acceptance of the Plaintiff’s explanation to the correspondence dated 18^th August 2016 issued by PNGFA” and that it “shall refrain from taking further action in respect of the said correspondence” and (2) further confirming that FCA No.: 10-06 is still valid, the Plaintiff shall be deemed to have relieved the risk of cancellation of the Licence.

22.It should also be mentioned that under Clause 9, the Plaintiff is entitled to claim the outstanding balance of the Later Stage Payments upon the Defendant’s default of any instalment payment.  Clause 13(a) provides that the Later Stage Payments would become the indebtedness of the Defendant upon the Plaintiff’s receiving the consideration in the sum of HK$30,000,000.

23.Merely by looking at the above terms of the Deed, the following points are noted:

(1) It has been agreed that upon completion, the 36% Shareholdings (i.e. 36% of the shares of Skywalker HK and 36% of the Shareholders’ Loan), the 15% Shares and another 15% of the Shareholders’ Loan (together with the 50% logging rights) would be transferred to the Defendant.

(2) However, at the time when the Plaintiff and the Defendant entered into the Deed, they apparently anticipated that there might be a potential risk as to whether the 50% logging rights could be freely transferred to the Defendant together with the 15% Shares and the other 15% of the Shareholders’ Loan without any dispute or encumbrance.  In other words, it appears that the parties clearly knew that whether the 50% logging rights could eventually be transferred to the Defendant would depend on AF(PNG)’s position.

(3) In the circumstances, under Clause 2(c)(i), Zheng, being another shareholder of AF(PNG), was required to provide a letter of guarantee to the effect that AF(PNG) would confirm its waiver of the 50% logging rights regarding the NUKU Project held under AF(PNG)’s name.  Moreover, Clause 2(c)(ii) contemplates the situation where AF(PNG) does not agree to waive the logging rights and decides to commence court proceedings in Hong Kong in respect of such rights.

(4) Further, the parties were also aware of the potential risk of cancellation of the Licence.  Hence, the Plaintiff’s obligations as stipulated under Clause 3 as referred above.

(5) The nature of the Later Stage Payments is not expressly stipulated in the Deed.  However, it seems clear from Clause 8 that the Defendant’s obligation to make the Later Stage Payments would arise upon Clause 3 being fulfilled.  The Deed is silent on what would happen to the Later Stage Payments if the 50% logging rights were not eventually transferred.

24.As mentioned above, the Defendant has paid the sum of HK$30,000,000; however, he did not make payment for the Difference or the Later Stage Payments.  In this action, the Plaintiff claims the full amount of the Later Stage Payments.

25.Before commencing this action, the Plaintiff, by letter dated 26 September 2017, asked the Defendant how he would make payment for the first instalment of the Later Stage Payments under Clause 8 of the Deed and also provided the Defendant with details regarding different payment options.  On 29 September 2017, the Defendant replied by saying that the time for fulfilling the payment obligation under Clause 8 had not yet arisen (without specifying reasons) and asking the Plaintiff to review the relevant provisions of the Deed.

26.By letter dated 3 October 2017, the Plaintiff informed the Defendant that the first instalment of the Later Stage Payments had already been overdue and also asked the Defendant to make payment either by depositing the amount into her bank account or by issuing a cheque.

27.On the same day (i.e. 3 October 2017), the Defendant replied to the Plaintiff.  In essence, the Defendant pointed out that the 50% logging rights had not been transferred to him.  In particular, he referred to Clause 2(c)(i) of the Deed and alleged that the Plaintiff failed to supply a letter of undertaking by Zheng confirming that he shall give up the 50% logging rights of the NUKU Project being held via AF(PNG).  The Defendant also said that Zheng was unable to sign such a letter of undertaking as a result of some court proceedings.  The key part of the Defendant’s reply is now reproduced as follows:

“貴我雙方於2016年9月1日所簽署的且已在執行中的該契約第一條中貴方擁有的Skywalker Global Resources Company Limited (“Skywalker HK”) 公司的51% 股權HK 及Skywalker HK通過全實子公司Skywalker Global Resources Company (PNG) Limited (“Skywalker PNG”) 所持有的NUKU項目100% 伐木權其中之50% 伐木權已一併轉讓給我方。而根據該契約第二條之 “ci” 條規定：貴方出具保證函（由律師見證由鄭毅生簽名認可）保證并確認其放棄其通過 “AFPNG” 所持有的NUKU 項目余下 50% 伐木權同持貴方也會即時將收回來的 NUKU 項目余下50% 木權轉讓給我方。現由於種種原因，主要是因為上述由鄭毅生簽名認可的條款現已進入司法階段，致使該條款所述事項尚未完成，而貴方現在提出要執行該合約中第八條即 “期款支付”，對此，我方認為這與貴我雙方本著友好協商、公平互惠簽署該契約的初衷不甚相符。雙方就該契約的執行要完整，因為該契約中每個條款的履行是相輔相成的且首都是關聯的，而目前的情況是我方只拿到 NUKU 項目的50% 伐木權。”

28.In the same letter, the Defendant also proposed, as a temporary measure, that before the Plaintiff’s compliance with Clause 2(c)(i), he would advance some loans to the Plaintiff for the purpose of covering the instalments which were supposed to be paid under Clause 8 of the Deed.

29.The court proceedings referred to in the Defendant’s letter dated 3 October 2017 should be HCA 2927/2016 which was brought by the Plaintiff against AF(PNG) and Zheng and it concerned disputes in relation to some other agreements between the parties for the purpose of jointly developing the NUKU Project and also sharing the profits arising from the operation of the Licence.  Subsequently, the Plaintiff discontinued her claim against AF(PNG) and Zheng after they had reached a settlement in or around January 2018.  However, in that action, there remains ongoing third party proceedings instituted by Zheng against the Defendant.

30.The Plaintiff replied to the Defendant by letter dated 19 October 2017.  Her position can be summarised as follows:

(1) The Defendant had already possessed 100% of the logging rights of the NUKU Project as a result of holding 51% of the shares of Skywalker HK through X. Gold.

(2) Clause 2(c)(i) of the Deed was only applicable to payment of the Difference and so it did not affect the obligation to perform the Later Stage Payments in Clause 8.

(3) The Later Stage Payments formed part of the consideration for the 36% Shareholdings in view of the stamp duty assessed for the transaction.

(4) Pursuant to Clause 13(a) of the Deed, the Later Stage Payments became the indebtedness of the Defendant upon the Plaintiff’s receipt of HK$30,000,000. As the Defendant had defaulted on the instalment payment, the Plaintiff was entitled to rely on Clause 9 and demand repayment of the entire Later Stage Payments.

31.The letter ended with an offer by the Plaintiff to have the dispute resolved by co-operative negotiation pursuant to Clause 22 of the Deed. Subsequently, the Plaintiff sent several letters to the Defendant asking for a response. None of these letters was met with any reply from the Defendant.

32.Matters then proceeded as follows.  On 21 March 2018, the Plaintiff issued a writ of summons endorsed with a Statement of Claim for the present action. She claims against the Defendant a sum of HK$50,000,000, being the amount of the Later Stage Payments.  On 4 April 2018, the Defendant filed his acknowledgement of service stating his intention to defend the proceedings. On 13 April 2018, prior to the initial deadline for the Defendant to file his defence, the Plaintiff took out the O.14 Summons and also filed her affirmation in support of the application. On 14 May 2018, Master M Wong gave leave for the Defendant to file his Defence and Counterclaim within 28 days. [1]

33.On 9 July 2018, the Defendant filed his Defence and Counterclaim. The Defendant avers that:

(1) The logging rights were the sine qua non (i.e. an indispensable part) of the NUKU Project.

(2) Consideration for the share transfer was only HK$30,000,000 (as opposed to HK$86,000,000) as the obligation to pay the remaining sums (including the Later Stage Payments) was in fact subject to the conditions set out by the Deed.

(3) The 15% Shares included the 50% logging rights (indirectly held by the Defendant through AF(PNG)), which, in turn, imposed an obligation to make the Later Stage Payments in the total sum of HK$50,000,000.  According to the Defendant, the Later Stage Payments should in effect be “royalty” payments payable by the Defendant to the Plaintiff.

(4) It was an implied term of the Deed that the NUKU Project would remain the responsibility of the Plaintiff.

(5) Under the Deed, the Plaintiff was obliged to procure the transfer of the 50% logging rights (indirectly held by Zheng through AF(PNG)) to the Defendant or X. Gold. Instead of doing so, the Plaintiff commenced legal proceedings against AF(PNG) and Zheng in HCA 2927/2016 in or around November 2016. Zheng and the Plaintiff subsequently signed a settlement deed in January 2018 (without the knowledge of the Defendant), but the settlement terms neglected to consider the status of the 50% logging rights. The Defendant alleges that the Plaintiff was in breach of the Deed by failing to transfer the 50% logging rights to the Defendant.  The Defendant’s case is that the operation of Clause 8 would depend on the fulfilment of Clause 2(c)(i).

(6) The Defendant also counterclaims against the Plaintiff for fraudulent or negligent misrepresentations and seeks, inter alia, rescission of the Deed with damages to be assessed.

34.On 19 July 2018, the Defendant filed his 1^st affirmation in opposition to the O.14 Summons.  Subsequently, by letter dated 8 October 2018 (i.e. about 3 months after the Defence and Counterclaim was filed), the Plaintiff notified the Defendant of her intention to withdraw the O.14 Summons by stating the following:

“We are instructed that our client would like to withdraw the Order 14 application filed herein on 13 April 2018 because in the Defence and Counterclaim filed herein on 9 July 2018, your client has raised the factual issue of the March 2015 Representations and August 2016 Representations (as defined in the Defence and Counterclaim) … Therefore, the costs of our client’s Order 14 application should be in the cause pending the final determination of the issue raised by your client.”

35.It is also worth mentioning that apart from the present action and HCA 2927/2016, there are 2 other actions, namely HCA 2394/2016 which was commenced on 15 September 2016 and HCA 2260/2018 which was commenced after this action.  The former concerns the Defendant’s claim against Zheng for a sum of money relating to their agreement to acquire the shareholding from the Plaintiff and also the operation of the NUKU Project. The latter relates to the Plaintiff’s claim against the Defendant for payment of the Difference under the Deed.  On 18 March 2019, it was ordered that the present action and HCA 2260/2018 be formally consolidated and proceed as one action to be heard together with HCA 2394/2016 and HCA 2927/2016.

C.  The Correct Legal Test

36.Both parties accept that the Master had a wide discretion in making orders as to costs.  Accordingly, this Court will not readily set aside the Costs Order unless it is satisfied that the Master’s decision was unreasonable or erroneous at law.

37.For the Defendant, Mr Lam SC submits that the Master erred in law by relying on O.14, r.7 which, he says, applies only where the court refuses to grant summary judgment after a contested hearing. Instead, as contended by Mr Lam, the Master ought to have followed the principles governing withdrawals of summonses under O.21, r.6.  In this regard, I have been referred particularly to Uni-Creation Investments Ltd v Secretary for Justice (unreported, HCMP 2166/2015, 30 June 2017), where Au-Yeung J held at §§9-12: [2]

“9. As a general rule, an applicant or appellant has to pay the other side’s costs if he decides to withdraw an application or appeal: To Wai Chan Henry v Aon Services Hong Kong Ltd [2015] 1 HKLRD 811 at §24, G Lam J; Best Joint Investments Ltd v Kagani Ltd (unrep, HCA 2608/2006, 20 June 2008) at §§8-9, Chung J.

10. To persuade the court to depart from the general rule, the minimum an applicant has to do is to show that the discontinuance is for reasons other than an acknowledgment of defeat or likely defeat. The most direct way of proof is to show that the applicant would have succeeded if the application had been proceeded with: see Coqueen Co Ltd v Chui Wai Kwan & ors (unrep, HCMP 438/2010, 8 December 2015) at §40, To J.

11. Even if the applicant had behaved “reasonably” in making the application, he would still have to pay the costs of such application to the respondent. For example, in Johnson v Thor Building Design Services (1992) 8 Const LJ 204, the plaintiff issued proceedings on the strength of a previous House of Lords case, which was subsequently overruled. As a result, it was agreed between the plaintiff and the 3^rd defendant that the claim no longer disclosed any cause of action. The judge considered that, since both parties were “innocent”, he could see no reason why costs should not follow the event and ordered the plaintiff to pay costs of the action to the 3^rd defendant: see §25.

12. Coqueen and Johnson dealt with costs of withdrawing substantive actions but I see no reason why those principles should not apply to the withdrawal of this summons.” (Emphasis added)

38.The above principles set out above must be correct.  If the parties agree that the withdrawal or discontinuance of an application or an action has not been caused by the fault of one party such that the relevant costs should not be solely borne by that party, they should be in a position to sign and file a consent summons or order for the court’s approval, which would normally include an agreed costs order.  Without any such agreement, it is generally incumbent upon the party seeking to withdraw to justify why it should not be liable for the costs arising from such withdrawal.  The court could however, according to Au‑Yeung J’s decision in Uni-Creation Investments as quoted above, depart from the general rule upon good reasons being shown.  For example, if the applicant is able to show that the decision to withdraw is caused by reasons other than an acknowledgment of defeat or that the other party’s conduct has contributed to such a decision, the court may consider an appropriate order which accurately reflects the circumstances of the case.

39.It should be noted that Uni-Creation Investments does not involve an Order 14 application.  It concerned a situation where the defendant lodged an appeal to the Court of Appeal and subsequently applied for a stay of execution of the judgment whereby it had already been held that the plaintiff’s use of the land as a columbarium did not contravene the terms of the Government Lease.  As a result of the judgment, the defendant was ordered to, amongst others, cancel and vacate some Warning Letters and Instruments of Re-entry registered in the Land Registry in relation to the land.  The defendant failed to comply with the order and the plaintiff threatened to issue contempt proceedings.  Thereafter the defendant took out a summons for a stay of execution pending the appeal.  However, the defendant’s application was overtaken by the passage of the Private Columbaria Bill which would, at least from the defendant’s point of view, render the stay of execution unnecessary.  In any event, the court held that the defendant made no mention of the merits of the grounds of appeal and also failed to demonstrate that the appeal would be rendered nugatory in the absence of a stay.  It was in these circumstances that the court ordered costs against the defendant in view of its decision to withdraw the application for a stay of execution.

40.In respect of the issue of costs in the context where a plaintiff withdraws an Order 14 application, the following should be noted:

(1) The court should be mindful of the need to ensure that the summary judgment procedure is not abused by litigants who attempt to make their cases unrealistically simple in the hope that a rapid result would be achieved via an Order 14 application.  Parties should not be encouraged to try their luck by issuing an Order 14 application when such a procedure is inappropriate in view of the nature and complexity of the dispute.  As Mummery LJ expressed in Doncaster Pharmaceuticals Group Ltd v The Bolton Pharmaceutical Company 100 Ltd [2006] EWCA Civ 661 at §§10-12:

“10. Everyone would agree that the summary disposal of rubbishy defences is in the interests of justice. The court has to be alert to the defendant, who seeks to avoid summary judgment by making a case look more complicated or difficult than it really is.

11. The court also has to guard against the cocky claimant, who, having decided to go for summary judgment, confidently presents the factual and legal issues as simpler and easier than they really are and urges the court to be “efficient” ie produce a rapid result in the claimant’s favour.

12. In handling all applications for summary judgment the court’s duty is to keep considerations of procedural justice in proper perspective.  Appropriate procedures must be used for the disposal of cases. Otherwise there is a serious risk of injustice.”

(2) In other words, an Order 14 application should not be used for issues which should and could only be resolved fully and properly at trial.

(3) If, for example, a defendant, in resisting an Order 14 application in a case which appears to be straightforward, suddenly comes up with a factual allegation which is not evidenced by any documents and such an allegation only appears for the first time in the defendant’s affirmation, the plaintiff is required to consider whether it should still proceed with the application by persuading the court that the allegation is simply unbelievable.  If the plaintiff takes the view that it may be too much of a gamble to continue to pursue the application and therefore decides to withdraw the application, it would be harsh in these circumstances to penalise the plaintiff for taking out the application by ordering it to pay costs of the application. 

(4) If a plaintiff fails in an application for summary judgment, the court needs to consider if it should be ordered that the Order 14 summons be dismissed or that there be unconditional leave to defend.  An order to dismiss should be made where the case is not within Order 14 or where the plaintiff knew, before the issue of the summons, that the defendant was relying on a contention which would entitle him to unconditional leave to defend (see Hong Kong Civil Procedure 2019[3], Vol 1, at §§14/7/2-14/7/3).  Normally, a costs order will be made against the plaintiff in the case where the Order 14 summons is dismissed whereas costs will be in the cause if unconditional leave to defend is granted to the defendant.

(5) However, the mere fact that a line of defence was known to a plaintiff does not necessarily mean that he should have known that it was not appropriate to take out the Order 14 application.  As Lam VP stated in Greater China Capital Inc v Gbtimes Ltd [2018] 1 HKLRD 210 §8, “[m]uch depends on the available evidence and the assessment of the probity of proceeding by way of O.14 is very often a matter of judgment.”

(6) It should be pointed out that any rigid application of the above factors may not be helpful.  After all, each case must be decided on its own facts.

(6) Further, as mentioned above, the Defendant contends that “O.14, r.7 only comes into play if and when the court refuses to grant summary judgment after a contested hearing”.  What the Defendant means, if I understand the argument correctly, is that since the Plaintiff has decided to withdraw the O.14 application without proceeding to a contested hearing on merits, the applicable principle is governed by O.21 r.6 as opposed to O.14 r.7.  No authority has been cited in support of this proposition.  In any event, I cannot accept this argument because in Viatech Engineering Ltd v The Ming An Insurance Co (H.K.) Ltd, HCA 2393/2007 (unrep, 16 October 2008) (cited by the Plaintiff), the court also considered a situation where the plaintiff withdrew the O.14 application before the substantive hearing with the only outstanding issue of costs to be determined by the court.  In Viatech, Deputy High Court Judge Au (as Au JA then was) clearly applied O.14 r.7 in addressing the question of costs.

41.In view of the above, I do not agree with the Defendant that the Master erred in principle on the basis that she failed to apply O.21 r.6.  According to O.14 r.7 and the matters set out in paragraph 40 above, the issue in the case is whether it was appropriate for the plaintiff to take out the O.14 application in the first place.  The applicable test in this regard, apart from whether the plaintiff’s case falls within the scope of O.14, is whether the plaintiff knew or ought to have known that the defendant has an arguable and credible defence.  This test has actually been identified in the Master’s decision (which will be further discussed below) and it involves a fact-sensitive question that the Master would have to consider, regardless of whether O.21 r.6 had been referred to in her decision or not.  Whether this question has been properly addressed and determined by the Master should be the main focus of this appeal.

D.  The Master’s Decision

42.Whilst there is no dispute that the Master has a wide discretion in making decisions on costs, such discretion cannot be exercised arbitrarily and must be exercised judicially and on established principles.  A decision on costs should be set aside if the Master erred in law or was unreasonable in the sense that she, for example, “either failed to take into account proper matters or took into account matters that should not have been taken into account”: Paul Y-ITC Construction Ltd v Kin Shing Co Ltd [1999] 1 HKC 511, at 515A-C; Hong Kong Civil Procedure 2019, Vol. 1, at §58/1/6.

43.At the hearing before the Master on 12 November 2018, the Plaintiff’s counsel informed the Court that the Plaintiff applied to withdraw the O.14 application but the parties could not reach any agreement on costs.  It was argued on behalf of the Plaintiff that the decision to withdraw was a “pragmatic” and “sensible” approach, given that the Defence and Counterclaim showed factual disputes.  On the contrary, the Defendant contended that in view of the previous correspondence between the parties, the Plaintiff ought to have known that the Defendant had an arguable defence which would entitle him to unconditional leave to defend.

44.The Master then went on to refer to the pre-action correspondence between the parties, in particular, the Defendant’s letter dated 3 October 2017 and also the Plaintiff’s reply dated 19 October 2017.  In doing so, however, the Master did not discuss the contents of such correspondence and no views were given as to whether the Plaintiff knew by way of the correspondence or otherwise, or ought to have known that the Defendant had any arguable defence in resisting the O.14 application.

45.What can be seen from the transcript is that the Master then pointed out that subsequently the Plaintiff wrote “four more follow-up letters between 20 November 2017 [and] 13 February 2018 to chase the defendant for a reply” but the Defendant remained silent.  She then said as follows:

“The fact that the defendant did not give any reply to the plaintiff’s letters or various letters, not even a bare denial or rejection to the plaintiff’s substantive letter of 19 October 2017, in my view, is important, to the extent that the plaintiff cannot be said to have acquired the knowledge of an arguable defence. The non-reply or the non-denial by … the defendant – can be taken or may be taken as he was unable to give an arguable reply to the plaintiff’s letter.”

46.Finally, the Master concluded that “upon considering all the circumstances of this case … the discretion of this court on costs should be exercised in favour of the plaintiff’s stance”.  It was therefore ordered that (1) leave be given to the Plaintiff to withdraw the O.14 Summons; (2) costs of the O.14 Summons be in the cause; and (3) costs of the hearing before the Master be summarily assessed at HK$50,000 payable by the Defendant to the Plaintiff forthwith.

47.It appears from the above that the Master, in reaching her conclusion, obviously placed emphasis on the fact that the Defendant had repeatedly failed to reply to the Plaintiff since her letter dated 19 October 2017; but at the same time, there was no analysis on whether, on the facts of the case (particularly in view of all the relevant correspondence), the Plaintiff knew that the Defendant raised a triable issue or a valid defence.  Whilst the Defendant’s continuous failure to respond to the Plaintiff’s letter dated 19 October 2017 and thereafter four “follow-up letters” may be considered rather unhelpful and also discourteous, it is irrelevant for present purposes as it does not address the question as to whether the Plaintiff was aware of the Defendant having raised a triable issue.  Further, such lack of response should not be taken to mean that the Defendant “was unable to” raise any arguable defence, as ruled by the Master. The key question before the Master should be whether, on the materials then available, the Plaintiff had knowledge of the existence of a triable issue. The fact that this question was not properly analysed in the Master’s decision, in my opinion, demonstrates a fundamental error.

48.For the purpose of this appeal, it would be neither appropriate nor necessary for me to express any views on the substantive merits of this case.  However, with respect, I am inclined to think that the following factors, if considered at the hearing below, would have led the Master to conclude that the Plaintiff knew or ought to have known that the Defendant was in possession of a contention (or that there existed a factual dispute) which would entitle the Defendant to unconditional leave to defend.

49.First, in response to the Defendant’s allegation (as stated in his letter dated 3 October 2017) that the 50% logging rights had not been transferred to him, the Plaintiff’s reply was that the Defendant had already been in possession of 100% of the logging rights in the NUKU Project given that 51% of the shares in Skywalker HK had been transferred to the Defendant’s nominated company, i.e. X. Gold.

50.However, Plaintiff’s reply does not sit quite comfortably with the fact that at the time when the Deed was entered into, the Plaintiff and the Defendant had obviously applied their minds to the potential risk regarding the transfer of the 50% logging rights, which would depend on whether Zheng would give up the 50% logging rights apparently held via AF(PNG). Hence, the requirement for a letter of undertaking by Zheng confirming his waiver or renunciation of such rights was imposed under Clause 2(c)(i).  The parties even went so far as to contemplate that legal proceedings might be instituted by AF(PNG) against the Plaintiff in respect of the logging rights. In other words, it does not necessarily follow from the mere transfer of 51% of the shares in Skywalker HK that the 50% logging rights would be transferred at the same time without any difficulty (as alleged by the Plaintiff).

51.Second, the Plaintiff’s reply dated 18 October 2017 failed to address whether the above issue regarding the transfer of the 50% of the logging rights (as foreseen by the parties according to Clause 2(c) of the Deed) had been resolved.  To say the least, the Plaintiff in the reply never mentioned whether the risk contemplated in Clause 2(c) of the Deed still existed and if not, how such risk had been removed.

52.Third, as mentioned above, the nature of the Later Stage Payments is not expressly stipulated in the Deed and is therefore unclear.  The Plaintiff argues that it formed part of the consideration for the transaction given the assessment of the relevant stamp duty.  This is disputed by the Defendant.  Even assuming that the Plaintiff’s case is accepted, there is still a question regarding what events would trigger the Defendant’s obligation to pay for the monthly instalments stipulated under Clause 8. 

53.It is true, as contended by the Plaintiff in this appeal, that Clause 8 only expressly refers to Clause 3 but not Clause 2(c) and also that Clause 2(c) seems to specifically address the payment of the Difference as opposed to the Later Stage Payments.  The Plaintiff further argues that Clause 3 has been fulfilled as a result of a letter dated 30 September 2016 issued by PNGFA.  However, the letter was not really couched in the same wording as what Clause 3 expressly requires.  Again, for present purposes, even assuming that the letter could satisfy Clause 3, one would still ask:  Should the Defendant be required to make payments under Clause 8 for the Later Stage Payments when the dispute on whether the 50% logging rights would be subject to the potential claims by Zheng or AF(PNG) (and thus, whether such logging rights could be transferred to the Defendant free from any encumbrances) appears to remain unsolved?

54.To answer the above question, it is necessary to ascertain the intention of the parties as at the time when the Deed was entered into in order to address the questions on the nature of the Later Stage Payments and its relationship, if any, with the transfer of the logging rights.   In fact, when the Plaintiff in her reply dated 19 October 2017 sought to refute the Defendant’s allegations, she also expressly referred to what she believed was the original intention of the parties.  In the circumstances, at least, this gives rise to a triable issue which could not be resolved by only considering the parties’ affirmations without a trial.

55.In view of the above, I am of the view that although the Master identified the correct test in her decision, she erred in failing to analyse the key question as identified in paragraph 47 above and also to consider the above matters which show that the Plaintiff ought not to have taken out the O.14 application.  On the other hand, the Master appeared to focus on the Defendant’s continuous failure to respond to the Plaintiff (after the Plaintiff’s letter dated 18 October 2017) which, as I have discussed above, did not address the real issue relating to the costs of the O.14 application. 

56.Further, it is worth noting that the Plaintiff has provided no explanation on why she only indicated that she would withdraw the application on 8 October 2018 when the Plaintiff admittedly acknowledged that factual disputes had been raised in the Defence and Counterclaim which was filed on 9 July 2018 (i.e. about 3 months earlier).  This should have been taken into account when the Master was considering the issue of costs at the hearing below.  However, this issue has now become irrelevant given my ruling that the O.14 application should not have been taken out in the first place.

57.In the circumstances, this appeal is allowed and the Costs Order made by the Master shall be set aside.  I make an order that the costs of the O.14 application (including the costs of the hearing before the Master) be paid by the Plaintiff to the Defendant forthwith, to be taxed if not agreed.  I note that the Defendant was represented by one counsel at the hearing below although two counsel were named in the Defence and Counterclaim. For the avoidance of doubt, costs of the O.14 application up to the hearing before the Master shall be assessed on the basis that only one counsel was involved.

58.I also make an order nisi that the costs of this appeal be paid by the Plaintiff to the Defendant forthwith, to be taxed if not agreed with no certificate for two counsel.  With no disrespect whatsoever, I believe that it is not appropriate to grant any certificate for two counsel in respect of this appeal as it is confined only to the issue of costs.  The order nisi shall become absolute unless an application to vary the same is made within the next 14 days.

Mr Wong Chi-Kwong and Mr Dexter Leung, instructed by Paul C.K. Tang & Chiu, for the Plaintiff

Mr Paul Lam SC leading Mr Justin Ismail, instructed by Khoo & Co, for the Defendant