AN INCONVENIENT TRUTH

04 February 2021

Can a party (such as a defendant) ever be held liable for contempt for making an erroneous admission of the plaintiff’s allegation?

The facts in summary

Bizarre as it may seem, the question arose in a Court of  Appeal case, Mathnasium Center Licensing LLC v Chang Chi Hung [2020] HKCA 1016, 11 December 2020 (Kwan V-P, Cheung JA, Au JA). The plaintiff sued for breach of a franchise agreement in relation to an educational program, related know-how and other intellectual property rights. One of the complaints was that the defendant, a former franchisee, failed to pay royalties and report the number of learning centres opened and operated by it. In the statement of claim the plaintiff asserted, incorrectly, that the learning centres were owned and operated by the defendant. In its defence, the defendant admitted the allegation as a result of a mistake made by its solicitor. In the usual way, the defence was supported by a statement of truth signed by its director (Mr Chang). The parties signed a consent judgment which was said to be based on the erroneous assumption contained in the admission. Later when the plaintiff encountered difficulties in enforcement proceedings, it sought to commit Mr Chang for contempt on the basis of the false statement of truth.* 

At first instance, Wilson Chan J found Mr Chang liable for contempt. The judge held that Mr Chang had no honest belief in the statement of truth in so far as it also verified the admission. Moreover, he knew that the false admission was likely to interfere with the administration of justice. The judge rejected the defence based on mistake and accepted the plaintiff’s theory that Mr Chang had deliberately lied in order to make it more difficult for the plaintiff to enforce the judgment. On appeal, the Court of Appeal overturned those factual findings, holding that there was at least a reasonable doubt as to how the erroneous admission came to be made.

A Novel Point of Law

Both the Court of First Instance and the Court of Appeal were invited to grapple with a new point of law. The question was whether an admission (as opposed to an averment) can be regarded as a statement of fact at all for the purpose of the “statement of truth” regime under O 41A, Rules of the High Court.Hitherto the contempt jurisdiction has only been employed to punish and deter dishonest allegations made by a party, usually a plaintiff putting forward a fraudulent case. It is used typically in relation to bogus employee compensation and insurance claims. In the Mathnasium case, however, the plaintiff sought, for the first time, to raise a charge of contempt against its opponent for erroneously admitting part of its (i.e. the plaintiff’s) own case. 

Quite apart from the absence of precedent, it may come as a surprise that a plaintiff may be allowed to do so when the error originates its own pleading. The idea appears to run counter to the adversarial nature of litigation. It effectively imposes a burden on the defendant to vet the other side’s pleading for mistakes on pain of committal.  Finally the rules of pleading are designed to encourage admissions and narrow disputes. Hence it is widely understood that a party may choose to admit as much of the opponent’s case as it sees fit, and cannot be forced to put into issue a point that it has no interest in challenging for reason of economy or otherwise.

Despite such formidable arguments to the contrary, the Court of Appeal upheld the judge’s view that an admission is indeed susceptible to the rigours of the statement of truth regime, just as much as a positive averment is. Given the grave consequences of a finding of contempt, the ruling may send shivers down the spine of every litigant and his legal adviser. No longer is it open to a litigant casually to admit its opponent’s case, even if the admission is against its own interest. Even though the requisite mens rea (lack of honest belief and knowledge of likely interference with the course of justice) may not be present in the majority of cases, it may be thought that the spectre of committal for his client is enough to make every pleader wary of making any unnecessary concession in his pleading. 

An important rider

Ultimately the Court of Appeal overturned the finding of contempt on the facts. While it was open, as a matter of law, to hold a person who makes a false and dishonest admission liable for contempt, in order to do so the court must be satisfied that the admission must be clear and unambiguous. On the face of it the admission in the defence appeared to be free-standing and unqualified. But the Court of Appeal found that admission was contradicted by other parts of the lengthy defence. Moreover, the statement of claim itself, read as a whole, was less than crystal clear on the asserted ownership status of the learning centres. For this reason the Court of Appeal disagreed with the judge’s view that the admission constituted a false statement of truth.

A sequel

Finally it is interesting to note that in allowing the appeal the Court of Appeal not only ordered the plaintiff to bear the costs of the committal application and of the appeal, but to do so on an indemnity basis. As is well-known it is common practice to order a respondent who is found guilty of civil contempt to pay the applicant’s costs on an indemnity basis. However the converse is not always the case: an unsuccessful applicant is not ordinarily made to pay the respondent’s costs on a higher basis.  

In this case the Court of Appeal found there were unusual features in the plaintiff’s conduct of the proceedings. The plaintiff had been told from the start that the admission relied upon was not clear and unqualified. Instead of withdrawing the charge it engaged in questionable tactics with a view to disguising the weakness in its case. Echoing the dicta of Russell LJ, the court opined that the committal application should not have been brought in the first place:

“Motions to commit a man to prison should not be launched except on solid grounds, and it would, I think, be unfortunate if plaintiffs were encouraged to think that where a defendant has acted rashly and foolishly, their threat to his liberty may, with luck, be made at his expense when they fail to establish a case of contempt.”

* Mr Chang was represented by CW Ling at first instance and in the Court of Appeal.

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