Li Cho Kwan v. Oliveiro Lana and Another
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HCA 505/2012 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF FIRST INSTANCE ACTION NO 505 OF 2012 __________________
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____________________ J U D G M E N T Index A. INTRODUCTION B. THE INDISPUTABLE FACTS C. LI’CLAIM AND OLIVEIRO’S DEFENCE D. WHETHER HKBA WAS ACTING AS OLIVEIRO’S AGENT E. WHETHER THE REPRESENTATIONS ARE ACTIONABLE F. WHETHER LI’S CLAIM IN MISREPRESENTATION WAS EXCLUDED BY ANY CONTRACTUAL TERM G. WHETHER LI RELIED ON THE REPRESENTATIONS H. WHETHER THE REPRESENTATIONS WERE FALSE
I. WHETHER THE REPRESENTATIONS WERE MADE FRAUDULENTLY J. LI’S ELECTION TO RESCIND THE SPA UPON DISCOVERING THE FALSITY OF THE REPRESENTATIONS K. REMEDIES GRANTED TO LI L. OLIVEIRO’S COUNTERCLAIM M. CONCLUSION A. INTRODUCTION 1.This is the trial of the claim made by the plaintiff, Li Cho Kwan (“Li”), against the 1st defendant, Oliveiro Lana, for misrepresentation. On 29 August 2013, the 1st defendant changed her name to Pemiga Oliveiro (“Oliveiro”). In respect of Li’s claim against the 2nd defendant, Hong Kong Business Agency Ltd (“HKBA”), she has already obtained a final and interlocutory judgment against HKBA. 2.This case is concerned with the sale of shares in a company called Maternia Trading Ltd (“Maternia”). Oliveiro used to be the sole shareholder of Maternia. Maternia was engaged in the trading of prenatal and postnatal products, baby care products and baby food. It acted as both wholesaler and retailer in Hong Kong. In about mid‑2011, Oliveiro decided to sell all her shares in Maternia. At the same time, Li was interested to acquire a business. HKBA was, apparently, a business consultancy firm assisting people to sell and buy businesses; and it acted as middleman in this transaction. Among other things, HKBA produced a business profile which contained an overview of Maternia. Li’s case is that she had been induced by certain statements in the business profile into agreeing to buy the shares in Maternia. However, she discovered very shortly after the completion of the sale that those statements were false. Hence, she decided to rescind the sale and purchase agreement. 3.Oliveiro denied that she was liable for the alleged misrepresentations on various grounds, including that she was unaware of the content of the business profile and HKBA was not acting as her agent in making the statements in the business profile. She did not admit that the statements in the business profile were false. She sought to rely on various clauses in the business profile and the sale and purchase agreement to support that she should not be held liable for misrepresentations in any event. 4.At the trial, Li and her husband, Tsui Hing Shan (“Tsui”), on the one hand, and Oliveiro on the other hand, gave evidence. In the light of the evidence given by the witnesses in court, in his closing submissions, Mr Yim for Oliveiro submitted that he would focus on one issue only, namely, the statements in issue in the business profile did not give rise to any actionable misrepresentations. Notwithstanding the concession made by Mr Yim, I shall analyse and set out my findings on the material issues below. After all, the burden is on Li to prove her case. B. THE INDISPUTABLE FACTS 5.Li is a university graduate holding a bachelor’s degree in business administration. She was a housewife at the material time, but had worked in an auditing firm before. Her husband, Tsui, is a certified public accountant in Hong Kong, and had worked in Deloitte before. He had interests in a number of companies, some of which were engaged in pharmacy business. 6.Oliveiro has received education up to Form 5 level. At the material time, apart from running her business in Maternia, she acted as a host in a morning radio programme and a chef in her private kitchen business in the evening. 7.Maternia (formerly known as Optimum Healthcare Limited) was incorporated in Hong Kong on 7 January 2008. Between 7 January 2008 and 31 December 2010, Oliveiro was the sole director and shareholder in Maternia. 8.At all material times, Maternia was engaged in the business of trading in prenatal and postnatal products, baby care products, as well as baby food. It would buy the products from suppliers in Japan. It would sell those products as wholesaler and also retailer in Hong Kong. Its clients included persons in Hong Kong and Mainland China. 9.On 18 August 2010, Oliveiro was adjudged bankrupt. On 31 December 2010, she resigned as the sole director of Maternia. One Mr Samuel Kam (“Kam”) replaced her, and became the sole director from 31 December 2010 to 1 August 2011. By a power of attorney dated 20 May 2011, Kam authorized Oliveiro to manage and operate the business of Maternia. 10.In about June 2011, Oliveiro decided to sell her business in Maternia. She instructed a staff member of Maternia, Ms Gia Wong (“Wong”), to find a business brokerage firm to assist her to sell the business. HKBA came into the picture as a result. 11.Wong provided HKBA with information about Maternia. HKBA then produced a business profile (ref no: CW000) (“the Business Profile”) concerning Maternia. Section A contained a “Business Overview”. The name of the business was not disclosed, and the business was simply described as:
12.Under “Business Highlight” of this section, one can see the following statements:
These two statements will be referred to as “the 1st Representation” and “the 2nd Representation” respectively, and “the Representations” collectively. 13.In the same section, the “Listing Price” was stated to be $1,200,000. 14.In section D of the Business Profile “Financial Information”, it was stated that the revenue was “HKD2,300,000 Cash basis” and that the profit was “HKD140,000”. They appear to be repetitions of the 2nd Representation. 15.Section F “Additional Remarks” reads as follows:
16.In around July 2011, Li was interested to acquire an ongoing business engaged in the trading of baby care, prenatal and postnatal products. She approached HKBA for assistance. By a Confidentiality and Service Agreement dated 6 July 2011 (“the Service Agreement”), she engaged HKBA to purchase a business from potential vendor on the terms and conditions stated therein. At the material time, one Ms Li Suet Hing Sandy (“Sandy Li”) and one Mr Ma Siu Kwan Alex (“Alex Ma”) were representing HKBA. 17.The Service Agreement is a one‑page document containing both a Chinese and an English version. It provided expressly that, should there be any discrepancies between the Chinese version and the English version, the English version shall prevail. Clause 4 in the “Remarks” section reads as follows:
18.Li said that Sandy Li of HKBA gave her the Business Profile on the same occasion when she signed the Service Agreement on 7 July 2011 (though it was dated 6 July 2011). 19.Li met Sandy Li and Alex Ma several times. She was also taken to Maternia’s office in Chai Wan. However, Li and Oliveiro only met at a café in Times Square, Causeway Bay, in the afternoon on 19 July 2011. Tsui, Sandy Li and Alex Ma were also present. 20.In that meeting, Li and Oliveiro signed a sale and purchase agreement dated 19 July 2011 (“the SPA”). Under the SPA, Oliveiro agreed to sell and Li agreed to buy the entire ownership in Maternia by way of transfer of shares at the price of $900,000. The completion date, or “handover date” as described in the SPA, was 1 August 2011. 21.Clause 8 under section “Other terms” provided that:
22.On the same occasion, Li and Oliveiro also signed a “附加協議條款”, in English “Additional Terms to Agreement” (“the Supplemental SPA”). It contained the following provisions concerning payment of the price:
23.Pursuant to the SPA and the Supplemental SPA, Li paid:
24.In addition, Li paid service fees in the sum of $68,000 to HKBA by a cheque dated 19 July 2011. 25.The sale and purchase of the shares in Maternia was completed on 1 August 2011 pursuant to the SPA. Li and Oliveiro executed an instrument of transfer dated 1 August 2011 whereby Oliveiro transferred 10,000 shares in Maternia to Li. Notices concerning resignation and appointment of director and secretary of Maternia were also filed to the Companies Registry. It appears that these documents were all signed on 27 July 2011. 26.As to the sum of $630,000 (ie 70% of the purchase price), Oliveiro claimed that she had only received $550,000 from HKBA, and the remaining sum of $80,000 had been kept by HKBA. 27.As to the sum of $270,000 (being 30% of the purchase price), it was held by HKBA as a stakeholder pursuant to the Supplemental SPA. 28.There were disputes between the parties concerning the handover of the business almost immediately after the completion of the sale. Li also discovered that Oliveiro was an undischarged bankrupt, and that the Representations were false. 29.By a letter dated 12 August 2011 (“the 12 August 2011 Letter”), Li, through her solicitors, wrote to Oliveiro as follows:
30.On 9 November 2011, the bankruptcy order against Oliveiro was annulled. 31.On 27 March 2012, Li issued the writ of summons herein. 32.On 22 May 2012, Li obtained a default judgment against HKBA. 33.On 23 October 2013, HKBA was wound up by the court upon the petition of Li. Mr Wong Sun Keung and Ms Tsui Mei Yuk Janice, both of Vision A S Ltd, were appointed as the joint and several provisional liquidators of HKBA. The sum of $270,000 has since then been held by the provisional liquidators pending the conclusion of these legal proceedings. C. LI’CLAIM AND OLIVEIRO’S DEFENCE 34.In the Statement of Claim, insofar as her claim against Oliveiro is concerned, Li pleaded that:
35.In the Amended Defence and Counterclaim:
36.In the statement of claim, Li sued Oliveiro in misrepresentation and for breach of contract. It appears to me that, in the present context, these two causes of action were mutually exclusive, and she had to make an election. In his opening submissions, Mr Sung confirmed that Li would only pursue her claim in misrepresentation. 37.I shall now turn to consider the issues in relation to Li’s claim in misrepresentation. D. WHETHER HKBA WAS ACTING AS OLIVEIRO’S AGENT 38.Oliveiro claimed that the Business Profile was not prepared, approved or confirmed by her. She also claimed that HKBA did not act as her agent to represent any information of the Business; and she had not authorized HKBA to make any such representation to Li. 39.Whether HKBA was acting as an agent, not only for Li, but also for Oliveiro, must be a question of fact depending on the particular circumstances of this case (Cheng Kwok Fai v Mok Yiu Wah Peter & Anor [1990] 2 HKLR 440 at 445E–I). The question is whether HKBA had actual, or apparent, or both types of authority to make the Representations on behalf of Oliveiro to Li. 40.In the statement of claim, Li relied on the following facts, which had not been disputed, to support her case that HKBA was acting as the agent of Oliveiro at all material times:
41.There were clear indications on the face of the SPA that, to the knowledge of both Li and Oliveiro, HKBA was acting as an agent for both parties in this transaction. In the SPA, clause 6 under section G “Other terms” provided that:
And clause 10 under the same section provided that:
42.An original Listing Agreement was produced by Li at the trial (“the Listing Agreement”). She found it in Maternia’s office after she took over the business on 1 August 2011. It was stapled together with a “Vendor Information”. In the Vendor Information, one Ms Tai was named as the contact person. Tai was the Chinese surname of Oliveiro at that time. Oliverio’s mobile phone number at that time was given as contact information. The Listing Agreement was signed by Wong on 2 June 2011. I note that Kam was named as the vendor in the Listing Agreement. However, Oliveiro admitted in court that this was an agreement that she had asked Wong to sign on her behalf in order to instruct HKBA to assist her to sell her shares in Maternia. 43.Oliveiro also stated in her witness statement that, out of the 70% of the purchase price in the sum of $630,000, she had only received $550,000 and she believed that HKBA had deducted $80,000 as agency fee. There cannot be any doubt that HKBA was acting as an agent for Oliveiro. 44.Clause 2 in the first section of the Listing Agreement provided that:
It was clearly contemplated that Oliveiro would provide information concerning Maternia’s business to HKBA in order to enable it to compile a business profile, and that such business profile would be shown to potential purchasers. 45.As mentioned above, the Disclaimer Clause in the Business Profile (and also the Remark Clause in the Service Agreement) also provided expressly that any information relating to Maternia’s Business was provided by the vendor. 46.Oliveiro said that she had instructed Wong to handle the sale of her shares in Maternia for her. Wong was the person who provided information about Maternia’s business to HKBA. While Oliveiro admitted that she knew that a business profile would be prepared by HKBA for potential purchasers, she claimed that she did not know the content of the Business Profile. She also claimed that she could not even remember when the first time she read the Business Profile was. 47.Irrespective of whether Oliveiro was actually aware of the content of the Business Profile, in view of the above evidence, there is no doubt that HKBA’s authority as her agent included the authority to pass on information concerning Maternia’s business (including the Representations in the Business Profile) to potential purchasers. In his closing submissions, Mr Yim realistically conceded this point. E. WHETHER THE REPRESENTATIONS ARE ACTIONABLE 48.As stated above:
49.In his closing submissions, the only point that Mr Yim pursued seriously is that, because of the clear wordings of the two said clauses, Li (and her husband), both well‑educated, as reasonable readers of the Business Profile, could not possibly regard the Representations in that document as definitive statements of fact, and hence make it unnecessary to verify their accuracy and truth before acting on the same. 50.I take the view that it is necessary to distinguish between the two following questions:
It appears to me that Mr Yim might have conflated the two questions in his submissions. At this stage, I shall focus on the first question. 51.As Walton J remarked in De Beers Abrasive Products Ltd v International General Electric Co of New York Ltd [1975] 1 WLR 972 at 978:
Although it appears that the core question is whether the statement is one on which the representee was entitled to rely on, there is no single test which defines when a misrepresentation is actionable. As observed in Cartwright, Misrepresentation, Mistake and Non‑disclosure (3rd edn, 2012), §3‑12 at p 43:
52.In this case, Mr Yim relied mainly on the wording of the two said clauses, in particular, the phrase “for reference only” which appeared in both clauses. He submitted that the present case is similar to the case of Yang Dandan v Hong Kong Resort Co Ltd, HCA 1787/2010 (2 October 2015, unreported). 53.In Yang Dandan v Hong Kong Resort Co Ltd, the plaintiff claimed that she relied on a written misrepresentation in a floor plan brochure concerning the sale of units in a residential development. DHCJ Kent Yee held that there was no actionable misrepresentation. Mr Yim relied in particular on the following paragraphs in the judgment:
54.In Chao San San & Anor v Worldpart Industrial Ltd, DHCJ To (as he then was) held in §31:
It is useful to read the next paragraph, §32:
55.In my view, in considering whether a misrepresentation is actionable, judicial precedents are, generally speaking, of little assistance. As is often said, in law, context is everything. Both precedents mentioned above were concerned with representations about something which was still under planning and not yet materialized. It is easy to understand why the learned judges in both cases came to the view that the phrase “for reference only” connoted that the representations in question were just “an indication of what the representor hopes or wishes or aims to achieve” and hence, a reasonable reader of those documents would not regard those representations as “any definitive statement of fact”. I do not believe the learned judges in the both precedents intended to lay down any rigid rule that the phrase “for reference only”, irrespective of the context in which it was used, would render any misrepresentation contained in the document in question not actionable. 56.I am aware that, sometimes, the phrase “for reference only” or like may have the effect of rendering what might appear to be a statement of fact not a representation of fact properly‑so‑called. A good example can be found in Montrio Ltd & Anor v Tse Ping Shun David, HCA 757/2009 (29 November 2011, unreported). That case was concerned with a statement that the gross area of a property was 12,254 square feet approximately. The relevant document issued by the estate agent contained a remark clause as follows:
I believe the phrase “for information only” (used in the remark clause in that case) bears, in most cases, substantially the same meaning as “for reference only”. Poon J (as he then was) held that the statement was not an actionable representation. He explained in §70:
There were two distinguishing features in that case. Firstly, the gross area of the property was stated to be an approximate only. Secondly, apart from stating that the statement was “for information only”, there were express statements that “No warranty for accuracy is given or implied by the owners or us” and that “Interested parties should satisfy themselves as to the accuracy of the particulars contained herein …”. In other words, there was a clear and unequivocal disclaimer about the accuracy of the statement. Poon J (as he then was)’s judgment on this issue was approved by the Court of Appeal in CACV 291/2011 (28 December 2012, unreported). In §51, Kwan JA held that:
This case shows that the phrase “for reference only”, or “for information only”, may assist the court to consider objectively whether a representation of fact properly‑so‑called has been made. But it also highlights the important point that such phrase must be considered in its context. 57.I shall consider the Remark Clause in the Service Agreement first. I do not agree that it has the effect of rendering the Representations, if false, not actionable:
58.I turn to the Disclaimer Clause in the Business Profile. This seems to be more significant because this was a provision which appeared in the document that contained the Representations. Again, I have come to the conclusion that the Disclaimer Clause does not have the effect of rendering the Representations, if false, not actionable:
59.Furthermore, the suggestion that it was unreasonable in the circumstances to rely on the Representations, or to take them seriously, seems to me to be commercially unrealistic:
60.Mr Yim submitted that, in considering whether the Representations, if false, gave rise to actionable misrepresentations, I shall take into account the personal background of Li and her husband. I take the view that, because Mr Yim’s submissions on this issue depend on the proper construction of the Remark Clause and the Disclaimer Clause, and that construction of a document is an objective exercise, I should approach the matter by reference to the meaning that those clauses would convey to a reasonable man. The actual background of Li and her husband is perhaps relevant only insofar that it may assist the court in deciding what the reasonable man in the present context should be. To that extent, I have taken into account the background of Li and Tsui. 61.Li and her husband said in court that they did not pay much attention to the said clauses. Mr Yim submitted that their evidence in this respect is incredible. I take the view that they must be aware of those clauses, although they might not have focused on them. In any event, Li had signed the Service Agreement containing the Remark Clause; it was not open to her to claim that she was unaware of it. Nevertheless, I am of the opinion that a reasonable man in the position of Li would have read, and been aware of the content of, those clauses. Having said that, my views in this respect does not impact on my conclusion on this issue. 62.For the above reasons, I reject the main submission made by Mr Yim. I hold that the Representations, if false, would give rise to actionable misrepresentations. F. WHETHER LI’S CLAIM IN MISREPRESENTATION WAS EXCLUDED BY ANY CONTRACTUAL TERM 63.As I said earlier, both the Remark Clause in the Service Agreement and the Disclaimer Clause in the Business Profile provided that the information in the Business Profile would be subject to the terms and conditions of the sale and purchase agreement to be executed between the parties. 64.In Mr Yim’s opening submissions, he submitted that the clear wording of the Entire Agreement Clause in the SPA would give a clear answer to Li’s claim in misrepresentation. As mentioned, that clause reads as follows:
65.I take a firm view that this clause could not exclude Oliveiro’s potential liability for misrepresentations due to the falsity of the Representations:
66.Mr Yim did not pursue his argument in relation to the Entire Agreement Clause in his closing submissions. It is unnecessary for me to consider Mr Sung’s submissions that the Entire Agreement Clause should be construed as an exemption clause, and that it was unenforceable because of section 4 of the MO, or section 3 of the Control of Exemption Clauses Ordinance (Cap 71). 67.Apart from the Entire Agreement Clause, Mr Yim has not suggested that there was any other term in the SPA or Supplemental SPA which may exclude, or impact on, Oliveiro’s potential liability for misrepresentations due to the falsity of the Representations. 68.In short, I hold that the SPA and the Supplemental SPA did not contain any provision which could exclude Oliveiro’s potential liability for misrepresentations. G. WHETHER LI RELIED ON THE REPRESENTATIONS 69.As I stated earlier, whether the Representations, if false, are actionable and whether Li had actually relied on the Representations are two separate questions. As I have held that the Representations, if false, are actionable, I shall now move on to consider the issue of reliance. The burden of proof is on Li to prove reliance on the Representations. 70.It is crucial to note that the question is whether Li actually relied on the Representations, not whether it was reasonable for her to do so. Having said that, whether it was reasonable to rely on the Representations is relevant to the onus of proof, and how the burden of proof on Li may be discharged. As Lam JA (as he then was) held in Master Yield Ltd v Ho Foon Yung Anesis & Anor [2013] 6 HKC 520 at527C–D, §22:
At pp 526H – 527C, §21, the learned judge cited Museprime Properties Ltd v Adhill Properties Ltd [1990] 2 EGLR 196 at 201M where Scott J (as he then was) held that:
71.In respect of the objective effect of the Representations, I repeat what I said above as to why, in my view, they, if false, would give rise to actionable misrepresentations. In short, I take the view that a reasonable man would be induced by them into entering into the SPA. The Representations were concerned with the scale of the business and its profitability; they must be highly material information to any reasonable potential purchaser. Hence, the burden is on Oliveiro to prove that Li had not in fact relied on the Representations. 72.Turning to the subjective state of mind of Li, I think the court should be cautious in evaluating self‑serving statements made by a plaintiff that he or she has relied on a representation. Such statements can be easily made after the event to support a claim. As mentioned earlier, Li claimed that she did not pay much attention to the Disclaimer Clause in the Business Profile or the Remark Clause in the Service Agreement. The potential significance of this piece of evidence is that, if Li was in fact aware of those clauses contrary to what she claimed, it might be argued that she had been alerted to possible inaccuracies in the Representations and, hence, one might draw an inference that she had not in fact relied on them. 73.Having regard to their personal background, as I said above, while I am prepared to accept their evidence that they may not have paid much attention to those clauses or considered their potential implications in detail, I take the view that they must have read, and were aware of the content of, those clauses. However, I do not think their knowledge of the content of those clauses can support an inference that Li had not actually relied on the Representations. To begin with, there is no evidence that Li (or Tsui) did not take the Representations seriously because of those clauses. More importantly, there are three pieces of compelling evidence supporting that Li had relied on the Representations. 74.Firstly, Oliveiro said that, after signing the SPA, because the updated financial reports of Maternia was not yet available, she had proposed to Li that the completion of the sale be postponed but Li rejected the proposal. Li and Tsui agreed that HKBA had told them that the updated financial records were not yet available. But they explained that they decided not to wait for the updated financial reports and to adhere to the complete date in the SPA (ie 1 August 2011) because they trusted the information in the Business Profile. 75.The second piece of evidence is concerned with the agreed price of $900,000 in the SPA. Li said that, initially, HKBA told her that the sale price was $1,200,000 (as stated as the Listing Price in the Business Profile); at the end, she agreed to the price of $900,000. Why did she agree to such price? Li said that this was based on her estimate that she could recover the price by the profits to be made in about one year’s time. Her estimate that she could be able to do so was, in turn, based on the 2nd Representation that, at that time, the profit of Maternia was $140,000 a month. 76.Thirdly, as mentioned, under clause 6 of the Supplemental SPA, HKBA shall release 15% of the purchase price to Oliveiro if Li had a monthly transaction average of three containers and a profit margin of 5% in the first three months after the takeover; and HKBA shall release the remaining 15% to Oliveiro if the same targets could be reached in the 4th to 6th months after the takeover. It is significant to note that in the draft Supplemental Agreement, the targets were initially stated to be four (not three) containers, and a profit margin of 6% (not 5%) a month. Li explained that the initial suggestions of four containers and 6% profit margin a month were based on the Representations. However, she was prepared to make some concessions after negotiations by reducing the number of containers by one, and also the profit margin by 1%, accepting that in the initial period after the takeover, the business may not be able to achieve the same results as those before the takeover. As a result, in the final version of the Supplemental SPA, there were amendments in handwritten manuscript changing the number of containers from four to three, and the profit margin from 6% to 5%. Oliveiro said that she did not know why Li made the initial suggestions of four containers and 6% profit margin in the draft Supplemental SPA. It was most inherently improbable that Li would simply pluck some figures in the air. It could not be a sheer coincidence that the initial suggestions made by Li matched exactly with the figures in the Representations. 77.I accept the evidence of Li and Tsui on the three above‑mentioned points. I take the view that they constitute compelling evidence that Li had actually relied on the Representations. Even if I am wrong in holding that the burden is on Oliveiro to show that Li was not induced by the Representations, and that the burden is on Li to prove inducement or reliance, I would have come to the same conclusion in the light of the said evidence. 78.Mr Yim submitted that Li was eager to close the deal and get the suppliers’ and customers’ information of Maternia so soon as possible so as to “catch the heat of the milk powder fever”. Li admitted that, at that time, there was a high demand for formula milk powder products in Mainland China, and people were confident in Japanese products. There is also evidence that Tsui was engaged in business of operating a pharmacy shop which sold, among other things, formula milk powders. I agree that there might well be other practical or commercial reasons inducing Li to acquire Maternia’s business at that point of time, and to conclude the deal in a rather short time‑frame. However, as Lam JA (as he then was) held in Master Yield Ltd v Ho Foon Yung Anesis & Anor [2013] 6 HKC 520 at 527I, §26:
79.As mentioned, Oliveiro said that she had offered to postpone the completion date for the SPA as the updated financial statements were not yet available. Apparently, her point is that it was Li’s own choice not to accept the offer; and had she accepted the offer, Li would and should have been able to verify the accuracies of the Representations. Such point cannot assist Oliveiro. First, by the time such an offer was made, Li had already signed the SPA. Second, it is well established that it is no defence to an action for rescission that the representee might have discovered the falsity of the representation by the exercise of reasonable care (Welltech Investment Ltd v Easy Fair Industries Ltd [1996] 4 HKC 711 at 720; Green Park Properties Ltd v Dorku Ltd [2000] 2 HKLRD 400 at 410E–F). 80.For the above reasons, I am satisfied that Li had relied on the Representations, and she was induced by them to enter into the SPA and Supplemental SPA. H. WHETHER THE REPRESENTATIONS WERE FALSE 81.The burden of proof is on Li to prove that the Representations were false. It is unnecessary for her to prove that each and every statement of fact in the Representations was false; she will succeed if she can prove that any one of them was false. H1. The 1st Representation 82.The 1st Representation included a statement that Maternia had four major Japanese Suppliers. 83.The documentary evidence only shows the names of two Japanese suppliers: FCS Corporation and Yoshida Takao Corporation. Apart from the absence of documentary proof as to the identity of the two other Japanese suppliers, Oliveiro was not even able to recall their names. On a balance of probabilities, I find that the 1st Representation was false in this respect. H2. The 2nd Representation 84.The 2nd Representation provided that Maternia had a monthly revenue of $2,300,000 with a profit margin of 6%, ie approximately $140,000. 85.Mr Sung has referred me to numerous accounting and bank documents to show that the 2nd Representation was wrong. It is unnecessary for me to consider these documents in detail. I shall focus on the key documents only. 86.In respect of a limited company, in considering its financial position, I believe the starting point must always be the audited financial reports of that company. I shall put aside Maternia’s audited financial report for the period from 7 January 2008 (the date of its incorporation) to 31 March 2009. According to that report, Maternia had not yet commenced business during this period. 87.What is highly material is the following information disclosed in the income statements in the audited financial reports of Maternia for the period ended 31 March 2010 and 31 March 2011:
88.In respect of the audited financial report for the year ended 31 March 2010, the auditor expressed an unqualified opinion that it presented a true and correct view of the state of Maternia’s affairs as at 31 March 2010 according to the best of his information and explanations given to him, and as shown by the records of Maternia. However, in respect of the audited financial report for the year ended 31 March 2011, the auditor was unable to form the same opinion. This was because the auditor was unable to attend a physical count of stocks as at 31 March 2011 and there were no practicable alternative auditing procedure that he would apply to verify the quantities, existence and condition of the stocks. 89.In respect of the period between 1 April 2011 and 1 August 2011, there were management accounts only. For this period, the revenue was $9,367.30, the gross profit was $4,499.30 and the loss was $74,285.04. Oliveiro explained that, because of the “3·11 Tohuku earthquake and tsunami” that took place in Japan on 11 March 2011, and the Fukushima nuclear disaster, Maternia had not been able to order any goods from its Japanese suppliers since around 17 March 2011 up to the time the SPA was concluded, and hence, there was little business for the period from April 2011. 90.The figures shown in the said management accounts appear to match with the bank statements of Maternia’s account in The Hongkong and Shanghai Banking Corporation Limited (“HSBC”). While Oliveiro stated in her 2nd supplemental statement that Maternia had only one bank account in HSBC, she said in court that there were other accounts in Mainland China but she was unable to provide any particulars or documentary proof. Nevertheless, the bank statements relating to the account in HSBC did not support the 2nd Representation. 91.On or about 4 July 2011, Wong had provided to HKBA a set of income statements for the period between May 2010 and May 2011. It is unnecessary for me to refer to the details of these statements. Suffice to say that they did not support the 2nd Representation. 92.The undeniable fact is that the bank and accounting documents relating to Maternia did not support the 2nd Representation. The explanation given by Oliveiro is that the documents did not reveal the full and complete picture because Maternia was engaged in parallel imports which very often involved cash transactions with no documentary record at all. I take the view that her evidence in this respect cannot assist her for the following reasons:
93.What is most telling and conclusive is that Oliveiro admitted in court that the 2nd Representation was untrue. She said that it was possible and probably true that, in a particular month, Maternia had a turnover of $2,300,000, a profit margin of 6% and profits in the sum of $140,000. In other words, these figures reflected the best scenario. However, she admitted that it was impossible that Maternia achieved such results every month; those figures could not be the average monthly figures. In her own words, the 2nd Representation did not make sense. 94.In view of Oliveiro’s said admission in court, Mr Yim, in his closing submissions, accepted that some content in the Representations was incorrect. For the above reasons, I have no hesitation in concluding that both Representations were false. I. WHETHER THE REPRESENTATIONS WERE MADE FRAUDULENTLY 95.Li claimed that the Representations were made fraudulently. 96.In his closing submissions, Mr Sung submitted that HKBA made the Representations fraudulently, and because HKBA was acting as Oliveiro’s agent, Oliveiro was vicariously liable. As I pointed out to Mr Sung, this is not the pleaded case of Li. Her pleaded case is that Oliveiro, not HKBA, possessed the fraudulent state of mind. The default judgment entered against HKBA was not based on any fraudulent state of mind on the part of HKBA. The state of mind of HKBA is not an issue before me. I am not in a position to make any finding on its state of mind in the circumstances. 97.Mr Sung then submitted that, in any event, Oliveiro had the fraudulent state of mind and was guilty of fraudulent misrepresentations. I decline to accept Mr Sung’s submissions in this respect for the following reasons:
98.In my view, Li may simply reply on the common law and section 3 of the MO. J. LI’S ELECTION TO RESCIND THE SPA UPON DISCOVERING THE FALSITY OF THE REPRESENTATIONS 99.Li claimed that she discovered the falsity of the Representations very shortly after she took over the business on 1 August 2011. Hence, by the 12 August 2011 Letter, she rescinded the SPA (and the Supplemental SPA) through her solicitors. 100.For reasons stated above, I am satisfied that, in these circumstances, Li was entitled to rescind the SPA (and the Supplemental SPA). It is trite that the right to rescind does not depend on proof of fraud and is also available for even wholly innocent misrepresentations. As stated by Lord Herschell in Derry v Peek (1889) 14 App Cas 337 at 359:
101.Although the SPA had already been performed, and the shares in Maternia had already been transferred to Li by 12 August 2011, this was not a bar to rescission. Section 2(b) of the MO provides that:
102.No court order is necessary for rescission to take effect: the right to rescind the transaction is that of the representee, not the court; rescission is effected by an equivocal election by the respresentee which demonstrates clearly that he elects to rescind the contract and to be no longer bound by it (Cartwright, Misrepresentation, Mistake and Non‑disclosure (3rd edn, 2012), §4‑18 at pp 121 – 122). I take the view that the 12 August 2011 Letter constituted an effective election by Li to rescind the SPA and the Supplemental SPA. 103.I note that, in the 12 August 2011 Letter, Li’s solicitors did not explain in detail how Li had discovered that the Representations were untrue. The solicitors also complained that Oliveiro had breached the agreements, and that they were void, on other grounds. I also note that Li only obtained the audited financial reports of Maternia for the year ended 31 March 2011 after 26 September 2011 (which was after the 12 August 2011 Letter). She now relies on this financial report and some other documents that she obtained after 12 August 2011 to support her claim that the Representations were false. 104.In law, an election to rescind may be made by a letter issued by a solicitor, whether all of the stated grounds for rescission are later established or not; and there are authorities that a party electing to rescind may justify his action by reference to the true facts at the time the contract was entered into, and is not restricted to those matters advanced by or known to him when the election is made (O’Sullivan and others, The Law of Rescission (2nd edn, 2014), §11.04 at p 235 and §11.10 at p 236). Mr Yim has not suggested that, if Li was entitled to rescind the SPA and the Supplemental SPA, the 12 August 2011 Letter did not constitute a valid and effective election to rescind the agreements. K. REMEDIES GRANTED TO LI 105.First, as Li had already elected to rescind the SPA and the Supplemental SPA by the 12 August 2011 Letter, it would be sufficient for me to grant a declaration that she had rescind those agreements lawfully. 106.Second, in the 12 August 2011 Letter, Li asked for the return of the purchase price in the total sum of $900,000. Upon rescission of the contract, in principle, the parties must each return to the other what they have received under the contract (Cartwright, Misrepresentation, Mistake and Non‑disclosure (3rd edn, 2012), §4‑17 at p 119). I take the view that, in considering what remedies ought to be granted to Li in this respect, it is necessary to consider the sums of $630,000 and $270,000 separately:
107.In the 12 August 2011 Letter, Li also asked for an indemnity for the sum of $68,000 which had been paid to HKBA as service fees. In addition to this sum, as set out in a document entitled “P’s Damages” dated 8 March 2016, the parties have agreed that Li has suffered loss and damage in the net sum of $56,519.94. It is unnecessary for me to set out the particulars here. Suffice to say that they were concerned with payments made to third parties such as Maternia’s employees, landlord, etc, in order to discharge Maternia’s legal obligations. There are two legal bases to explain why Li is entitled to claim this sum from Oliveiro. First, the common law allows a representee to claim an indemnity to compensate him for the obligations undertaken or expenditure incurred in favour of third parties under the contract which is rescinded, although the scope of the indemnity is not entirely clear (Cartwright, Misrepresentation, Mistake and Non‑disclosure (3rd edn, 2012), §4‑17 at pp 119 – 120; O’Sullivan and others, The Law of Rescission (2nd edn, 2014), §§17.23 – 17.29 at pp 354 – 356). Second, she is entitled to claim damages under section 3(1) of the MO (Cartwright, supra, §4‑17 at pp 120 – 121). As mentioned, Mr Yim agreed that Li is entitled to claim this sum of money. 108.In his closing submissions, Mr Sung also invited me to make the following orders:
109.I take the view that Mr Sung’s request for such orders is misconceived:
110.After the completion of the oral closing submission, I invited parties to file written submissions to address me further on this point. Mr Sung submitted a “Submissions on Court’s Jurisdiction to rectify/remove documents from the Companies Registry” dated 9 March 2016 whereas Mr Yim elected not to make any further submissions. Mr Sung’s submissions revealed a fact unknown to me, and probably unknown to the parties, previously: on 24 April 2015, the name of Maternia has been struck off the Companies Register and Maternia was accordingly dissolved pursuant to section 746(2) of the Companies Ordinance (Cap 622) (“the CO”). Mr Sung asked me to make an order to compel Oliveiro to make an application under section 765 of the CO to restore Maternia to the Companies Register so that the information contained in the Form D2A dated 11 August 2011 can be rectified. 111.I must say that I was taken by surprise by the fact revealed in Mr Sung’s submissions. I would have thought that the dissolution of Maternia, which took place in April 2015, was a material fact that both parties should be aware of and bring to the attention of the court much earlier. The fact that it was only discovered on 8 March 2016 indicates that neither party is now interested in the company at all. In practice, Maternia has ceased operation for a long time. In principle, Li ought to have returned the shares in Maternia to Oliveiro. While this would be possible after she elected to rescind the SPA up to 23 April 2015, it was no longer possible and meaningful to do so after 24 April 2015 upon the dissolution of Maternia. Mr Yim has not made any submissions in reply to Mr Sung’s latest submissions. Oliveiro has not pleaded impossibility of restitution as a defence; and there is no evidence that, in practice, she wants to have the shares in Maternia returned to her. On the other hand, I fail to see any practical reason why it is now necessary to rectify the Form D2A, and I doubt whether there is any valid ground to rectify the document pursuant to section 42 of the CO as suggested by Mr Sung. In the circumstances, I am not convinced that I should make any order to compel Oliveiro to apply to restore Maternia to the Companies Register in order to facilitate the making of an application under section 42 of the CO. 112.I should add that I cannot see what material prejudice Li will suffer in practice as a result of my refusal to make the orders as proposed by Mr Sung. As Maternia has been dissolved, she will not incur any further liability as shareholder or director. As to liability that she has incurred as shareholder or director before the dissolution of Maternia, as stated above, I have awarded her damages in relation to the costs and expenses that she had incurred as claimed. There is no suggestion that she has incurred any other liability not covered by the claims that she had made. L. OLIVEIRO’S COUNTERCLAIM 113.As mentioned, Oliveiro counterclaimed mainly for the sum of $270,000. She also counterclaimed for a small sum of $12,130 which she had paid to satisfy an award made by the Small Claims Tribunal against her and Maternia in relation to the failure to pay the hire‑purchase fees for a photocopier of Maternia. She also claimed damages to be assessed. 114.Mr Yim has not made any submissions on the counterclaim. Nevertheless, in view of my conclusion that Li succeeds in her action, it must follow that Oliveiro’s counterclaim shall be dismissed. M. CONCLUSION 115.For the above reasons, I shall make the following orders:
116.The sum of $754,519.94 is the total sum of $630,000, $68,000 and $56,519.94 considered above. I have decided to award interest on the total sum that ought to be paid or returned to Li at the commercial rate (ie 1% above the prevailing prime lending rate of HSBC) from the date of writ until judgment, and thereafter at the judgment rate until payment. 117.As to costs, Mr Yim submitted that, firstly, there should be no order as to costs; and secondly, if any costs are awarded to Li, they should be taxed on the District Court scale only. 118.I shall deal with the second point first. As the amount at stake is more than $1,000,000, I cannot see any reason to award costs to Li on the District Court scale only. As to the first point, Mr Yim submitted that no costs should be awarded to Li considering her conduct of her case. In his closing submissions, he submitted that, alternatively, Li should be deprived of 60% of her costs. Mr Sung, on the other hand, submitted that Li should not be deprived of any of her costs. 119.I agree that since the introduction of Order 62, rule 5, in particular rule 5(2), under the Civil Justice Reform, the courts are more ready to depart from the starting point of costs following the event (Chan Shun Kei v Hong Kong Construction (Hong Kong) Ltd, CACV 192/2014 (7 March 2016, unreported), §24). The court has a wide and unfettered discretion to deprive a successful party part of his costs because of his conduct. However, such discretion must be exercised judicially and cautiously. A successful party may be deprived some of his costs if he failed on some of the issues, or on account of lack of utility of some of the evidence (CLP Power Hong Kong Ltd v Commissioner of Rating and Valuation, HCMP 3207/2015 (14 March 2016, unreported), §5). 120.The gist of Mr Yim’s submissions is that Li had made allegations, in particular, for breach of contract, which were not pursued. Mr Sung submitted that in the statement of claim, there were only three paragraphs concerning such allegations (ie §§16 – 18). I have read the pleadings, the witness statements and the documents again in order to decide how I should exercise my discretion on costs. While it seems correct that only a few paragraphs in the statement of claim were concerned with Li’s claim for breach of contract (which she had abandoned), I note that in the Reply, the witness statements and the documentary evidence, there were substantial references to events that took place after 1 August 2011 which were apparently relevant to such claim. I appreciate that Li and Tsui were giving a narrative account of the events in a chronological order, and therefore, it may be inevitable that they would touch upon events after 1 August 2011 in any event. However, some evidence concerning the disputes between the parties about the handover of the business was not relevant to her claim in misrepresentation at all. On the other hand, Mr Sung made it clear in his written opening submissions that he would only pursue the claim in misrepresentation; and hence, no time and costs had been spent at the hearing of this trial on the claim for breach of contract which had been abandoned. In respect of her claim in misrepresentation, the only substantial point that I have not accepted is that Oliveiro was guilty of fraud. I must of course bear in mind that Li is the successful party. 121.All in all, I agree that Li should be deprived of some of her costs to reflect that the fact that she had abandoned her claim for breach of contract, and that some of the evidence she adduced was useless. However, in my view, only a small proportion of her costs should be deprived on such grounds. Mr Yim merely made rather bold submissions in this respect without any detailed analysis as to why Li should be deprived of 60%, let alone, all of her costs. Adopting a broad brush approach having regard to all relevant circumstances, I shall deprive Li 10% of her costs. 122.Of course, Oliveiro shall only be liable to pay the costs of Li’s action against her, but not those relating exclusively to Li’s claim against HKBA. I appreciate that some of the costs incurred as against Oliveiro and HKBA would overlap, and Li would have to incur the same amount irrespective of whether she sued Oliveiro only, or both defendants. Li should be entitled to recover such common costs jointly and severally from Oliveiro and HKBA. It would be a matter of taxation to determine how much Oliveiro shall pay as costs to Li. 123.Accordingly, I shall make a costs order nisi that the 1st defendant do pay 90% of the costs of the plaintiff in this action against the 1st defendant. This costs order shall bear the meaning as I explained above. It will become absolute unless any party makes further submissions on costs within 14 days after this judgment is handed down (in such event, I shall dispose of the issue on costs on papers). Such further submissions should be confined to matters that had not been argued before me.
Mr Samuel Sung, instructed by B Mak & Co, for the plaintiff Mr Foster Yim, instructed by Bobby Tse & Co, for the 1st defendant |
四個貨櫃，而毛利 (賣貨價扣除來貨價，未扣除其他任何成本) 達5
6% ，"商機無限" 應發放15% 成交款項予賣方；買方接手第四至六個月每月平均可交易三
四個貨櫃，而毛利 (賣貨價扣除來貨價，未扣除其他任何成本) 達5
6% ，則 "商機無限" 應按實際毛利按比例扣減款項退還買方。….」
4 containers in the first three months after the takeover with a profit margin (being the remainder after the deduction of costs of sale from the cost of goods, exclusive of any other costs) reaching 5
6%, [HKBA] shall release 15% of the transaction price to the Vendor; if the Purchaser has a monthly transaction average of 3Cases cited in this judgment
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