In the recent case of Lavery Co Ltd v Wong the High Court revisited the often thorny issue concerning the permissible boundaries for a plaintiff to put forward inconsistent alternative claims in a court pleading. In doing so, the court has confirmed that much rests on the knowledge of the relevant party at the time of advancing the alternative claims. While the general principles are not new, they are of significant practical importance to civil litigation in Hong Kong (and in jurisdictions that have similar civil procedural rules). The judgment in the case is a good illustration of the point.(1)
Since the introduction of the civil justice reforms in Hong Kong on April 2 2009, pleadings, witness statements and expert reports must be verified by statements of truth. Failure to make a statement of truth renders the relevant document susceptible to being struck out or inadmissible. Signing a statement of truth should concentrate the mind, because doing so without a true and honest belief could amount to (among other things) contempt of court.
In Lavery Co Ltd v Wong the first and second defendants were the director and employee of the plaintiff, respectively. The plaintiff alleged that:
- the defendants had perpetuated various sham transactions through the plaintiff to cover up a significant loss arising from default by one of the plaintiff's customers; and
- as a result, the defendants had breached their fiduciary duties and duties to exercise reasonable skill and care.
The issue before the court was whether it was permissible for the plaintiff to advance alternative claims which, on their face, were inconsistent. In summary, these alternative claims were as follows:
- The alleged sham transactions (being the purported return of goods from the defaulting customer and the resale of those goods to a new customer on credit) were fictitious. The defendants had allegedly breached their duties by creating false documents to support the existence of the sham transactions; or
- In the alternative, if the sham transactions were in fact genuine, the defendants had allegedly breached their duties by allowing the new customer an excessive amount of credit and failing to obtain adequate security for such credit or to carry out an appropriate credit check.
The defendants alleged that the alternative claims were inconsistent and mutually exclusive, on the basis that if the return of the goods from the defaulting customer never took place, those goods could never have been resold. Therefore, so the argument went, it was not open to the plaintiff to advance an alternative claim based on a resale having taken place.
As is not uncommon in Hong Kong, the matter came before the court on the defendants' application to strike out what they regarded as the offending parts of the plaintiff's pleading and the plaintiff's corresponding application to amend its pleading.(2)
In civil proceedings in Hong Kong, a party may, in any pleading, make an allegation of fact which is inconsistent with another allegation of fact in the same pleading if:
- the party has reasonable grounds for doing so; and
- the allegations are made in the alternative.(3)
Therefore, pleading alternative claims is permissible if the party believes that the facts will ultimately correspond to one or other of the possibilities pleaded. However, if the matters pleaded are plainly within the party's knowledge (assessed at the time that the pleading is signed and verified by a statement of truth) such that the party must know which of the inconsistent alternatives is correct, the pleading of inconsistent alternative claims is not permissible.(4)
Based on the arguments, the court held that the plaintiff must have been aware of the facts to allow it to plead its primary claim against the defendants – what the court colloquially referred to as allegedly "cooking the books".(5) This was particularly given that the plaintiff had also pleaded that it had no records of any goods being returned from the defaulting customer or any delivery of these goods on a resale. Therefore, the alternative claim was impermissible as a matter of pleading.
As a result, the court ordered the exclusion of those paragraphs of the plaintiff's pleading which put forward an inconsistent alternative claim, while permitting the plaintiff to make consequential amendments to its pleading. The plaintiff is left to advance its primary claim and there is no suggestion that its statement of truth was mistaken.
As the court noted, the rule against pleading inconsistent alternative claims makes practical and commercial sense, in that dealing with inconsistent alternatives is often a waste of time and money – particularly if the plaintiff can make good its primary case. Therefore, inconsistent alternative claims should be permissible only in exceptional circumstances, much of which are fact sensitive.
Where a plaintiff is intent on pleading inconsistent alternative claims, careful attention should be given as to how the alternative claims are pleaded and presented, to ensure that they are reasonable on the evidence available. This places an emphasis on clients' instructions and plaintiffs' lawyers' drafting skills (in the knowledge that defendants or their lawyers will be alive to the issue).
In Lavery Co Ltd v Wong, for example, if the plaintiff was not actually aware of whether the transactions were a sham and there was no evidence available to support that they were (at the time of filing its pleading at court), the pleading could have been presented in a way to allow the inconsistent alternative claim. The turning point for the court appears to have been that the directors of the plaintiff had the books and records of the company in their possession. This in turn permitted the plaintiff to plead, with sufficient knowledge, its primary case – that the goods were never returned.(6)
For further information on this topic please contact Rebecca Wong or David Smyth at Smyth & Co in association with RPC by telephone (+852 2216 7100) or email (firstname.lastname@example.org or email@example.com). The RPC website can be accessed at www.rpc.co.uk.
(6) The outcome in the case (with respect to the plaintiff's and the defendants' respect applications) is also an example of some robust case management by a deputy judge (and one of Hong Kong's senior solicitor advocates). It will be interesting to see whether the plaintiff appeals.
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