The Duty Of Full And Frank Diligence In Ex-Parte Applications
HCA 1980 of 2015 was in many ways the jurisdiction’s first cryptocurrency-based litigation. The action was commenced by the largest developer of bitcoin mining hardware in PRC. On the other-side was a cryptocurrency-exchange which, on paper, was a BVI company (though based in Hong Kong).
The turning point of this case was marked by the setting-aside of the Plaintiff’s default judgment which shifted the balance of power dramatically. Eventually, after losing significant costs at the interlocutory stage, the Plaintiff sought to discontinue these proceedings and agreed to pay all costs of the Defense. This article will explore that turning point in the jurisdiction’s first cryptocurrency litigation.
The Plaintiff’s solicitors issued pre-action letter to the Defendant’s address in Hong Kong.
The Defendant issued a reply to the Plaintiff’s solicitors which the Plaintiff’s solicitors stamped “Received”. In the reply’s letterhead also displayed the Defendant’s address in Hong Kong.
The Plaintiff commenced proceedings and applied for leave to service out of jurisdiction. In their affidavit in support, the Plaintiff’s Solicitors declared:
“the Plaintiff was given to learn that the 1st Defendant’s registered office address is … British Virgin Islands … In the circumstances, service within jurisdiction is not possible because the 1st Defendant is Not incorporated / based in Hong Kong and does not have any address in Hong Kong”
“In light of the above, I verily believe that the 1st Defendant can only be located at the BVI Address”
Leave to service out of jurisdiction was granted.
The Plaintiff obtained Default Judgment against 1st Defendant.
Ordinarily, once a default judgment has been obtained, even if a Defendant is successful in setting the default judgment aside, the Defendant will have to pay costs and may even be subject to conditions.
Here, the challenge came not in the form whether service was ‘normal’ but that the Plaintiff’s leave to service out was irregular given that they have failed to disclose to the Court the possible avenue of communication in Hong Kong (attacking their foundation).
In short, not only was the Plaintiff’s default-judgment set-aside, the Plaintiff’s leave to service out together with such service was also set-aside. The Plaintiff’s was quintessentially sent back to square 1 after nearly 2 years of proceedings. The Plaintiff also had to pay for the 1st Defendant’s cost in the setting-aside application in the sum of HK$330,000 (the claim at the time was only 770,000 yuan).
Finding 1: The Imperative of Full and Frank Disclosure
It was found by the Court that from correspondences disclosed, what cannot be disputed is that the Plaintiff had knowledge of the office in Hong Kong. The Plaintiff was found to have known about the Hong Kong address and have even corresponded through it.
From the further exchanges, the Plaintiff knew that they maintained a BVI address as a BVI company only with no staff or operation.
Therefore, the Plaintiff’s failure to mention such information meant the Plaintiff breached their duty of full and frank disclosure. And by withholding such information, it deprived the court of making good orders. It deprived D1 of responding to such notice.
It was on such grounds that the Plaintiff’s leave to service out of jurisdiction was set-aside. All consequential services and order(s) were accordingly set aside as well.
Finding 2: Mere Inclusion of Exhibits NOT Full and Frank Disclosure
One of the interesting facts in this case was that the Defendant’s letter with markings of “Received” by the Plaintiff’s Solicitors stamp was adduced by the Plaintiffs themselves. Counsel for the Plaintiff attempted to assert that despite contrary disposition in the affidavit, the exhibit of the said letter was impliedly sufficient disclosure.
Master Kwang in his decision disagreed citing the fact that:
“They also have to identify relevant information. Therefore, just exhibiting without clear identification in affidavit (of a material fact) is unacceptable. It is not the Court’s duty to identify all documents exhibited.”
Take Away Points
This case serves as a stark reminder of diligent full and frank disclosure in that:
The duty to full and frank disclosure is strict. It must not just cover facts, but also point of law. Where point of law does cover, it should also be brought to attention.
Simply placing a document in exhibit is NOT full and frank disclosure. Simply exhibiting without clear identification in affidavit (of material fact) is unacceptable. It is not the Court’s duty to identify all documents exhibited.
The setting aside of the default judgment was only the first of a number of coordinated interlocutory applications which, within one year after, the Plaintiff agreed to discontinue and pay the defendants their costs in full (which was nearly three times the initial amount sought to recover by the Plaintiff).
This article is co-authored by Joshua Chu from ONC Lawyers, and it first appeared in The Law Society of Hong Kong. Read the original article here: http://www.hk-lawyer.org/content/2020-review-2021-outlook-crypto-markets-around-world.