Tin Lik v. Deutche Bank Ag and Others
Read the full judgment text of CACV 145/2016 on BabelCite. This Court of Appeal judgment was delivered on 23 June 2017.
1. In June 2007, a real estate investment trust by the name of RREEF China Commercial Trust (“the REIT” or “the Trust”) was listed on the Hong Kong Stock Exchange. It was a trust in respect of a commercial property in Beijing known as Gateway Plaza (“the Property”). It was a premium grade A office building developed by a company called Beijing Bestride Estate Development Company Limited. The Plaintiff (“Tin”) was the majority shareholder and chairman of the parent company of the developer. A
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CACV 145/2016 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF APPEAL CIVIL APPEAL NO 145 OF 2016 (ON APPEAL FROM HCCL NO 17 OF 2011) ________________________ BETWEEN
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________________________ J U D G M E N T ________________________ Hon Lam VP, Kwan JA and McWalters JA: Background 1.In June 2007, a real estate investment trust by the name of RREEF China Commercial Trust (“the REIT” or “the Trust”) was listed on the Hong Kong Stock Exchange. It was a trust in respect of a commercial property in Beijing known as Gateway Plaza (“the Property”). It was a premium grade A office building developed by a company called Beijing Bestride Estate Development Company Limited. The Plaintiff (“Tin”) was the majority shareholder and chairman of the parent company of the developer. After construction had been completed in 2006, the Property was transferred to Hong Kong Gateway Plaza Company Limited (“Hong Kong Gateway”), another company indirectly owned by Tin. 2.Tin entered into arrangement for the securitization of the interest in the Property in Hong Kong through a real estate investment trust. On 25 May 2007, Tin and his company Beijing Gateway Plaza (BVI) Limited (“Beijing Gateway”) (the parent company of Hong Kong Gateway) entered into an engagement letter with Deutsche Bank’s Hong Kong Branch and the Hong Kong and Shanghai Banking Corporation Limited for the proposed listing of the trust. The two banks would act as joint-sponsors of the IPO. 3.Under the arrangement, the 2nd Defendant (“the Manager”) would act as the manager of the REIT and the 3rd Defendant (“the Trustee”) would act as the trustee of the REIT. Their respective roles were set out in the Trust Deed of 28 May 2007 by which the REIT was set up. Prior to 28 February 2008, Tin owned 20% of the 2nd Defendant whilst the remaining 80% was owned indirectly by Deutsche Bank through its subsidiary Deutsche Asia Pacific Holdings Pte Limited. Tin was a director of the Manager until his removal on 26 October 2007. 4.The shares in Beijing Gateway (thus the indirect ownership of the Property) were sold by Tin to the Trustee under a Sale and Purchase Agreement of 4 June 2007 (“the SPA”) at the consideration specified in it. Under Clause 6.3.2, a Retention Sum (of US$20 million) would be withheld until 30th day after completion of the audit of the accounts for 2007 financial year or 31 May 2008 “subject to there being no material breach of the Warranties which will have a material adverse effect on the financial condition, prospects, earnings, business, undertaking or assets of the REIT or on the Property. 5.The Warranties were set out in Schedule 3 to the SPA. Amongst them, there were warranties as to the accuracy and adequacy of information disclosed by Tin to the Trustee (para 3), in particular the rental information relating to the tenancies at the Property (paras 10.6.4 and 10.6.9). 6.The consideration payable under the SPA was to be worked out in accordance with para 3.5.1. It had two components: the Adjusted Asset Value and the Adjustment Sum. The Adjusted Asset Value was based on an adjustment of the Acquisition Value of $3,822 million in accordance with para 3.2. The adjustment was to be undertaken by the Auditors during the Adjustment Period pursuant to para 7 of the SPA. The adjustment resulted in $64,955,000 payable to Tin as vendor. 7.In addition, there was a dividend of $50 million declared by Beijing Gateway in respect of the year ended 31 December 2006. 8.After the listing of the REIT, the Manager discovered in August 2007 that there were discrepancies between the rental information provided on behalf of Tin and the actual rental income derived from the tenancies. The Manager investigated the discrepancies and its executive director Paul Keogh had meetings with Tin about them. 9.On 6 September 2007, the trading of the units in the REIT at the Hong Kong Stock Exchange was suspended. The next day, Tin executed a Letter Agreement (“the Letter Agreement”) under which he agreed to pay $278,526,708 to the Trustee. Under clause (d) of the Letter Agreement, Tin “irrevocably and unconditionally authorize [the Manager and/or the Trustee] to apply all or part of the sum … in or towards payment or reimbursement of any losses, damages, costs and expenses which are or may be incurred or suffered by the Manager, [the Trustee], [the REIT], and/or their related companies arising from any actual or potential discrepancies in the terms of the tenancy agreements.” Tin also undertook that if the sum was not sufficient to cover such losses, damages, costs and expenses, he would make further payment on demand from the Manager. 10.That sum of $278,526,708 was calculated by the Manager to be the expected shortfall in actual rental incomes under the tenancies and there would be an independent verification of the discrepancies. 11.Tin paid the sum of $278,526,708 on 7 September 2007 to the Trustee. 12.With such arrangement in place, the Manager made a public announcement on 10 September 2007 regarding the discovery of the discrepancies and the arrangement in place, including the payment by Tin. The Manager further opined that due to that arrangement the REIT would not suffer any shortfall in terms of rental revenue. The Manager also indicated that a full and independent sub-committee investigation would be conducted with independent valuation commissioned. The Manager requested for the resumption of trading of the REIT units on 11 September 2007. 13.The investigation by the independent sub-committee was completed and the board of the Manager endorsed their report. The board resolved on 26 October 2007 to remove Tin as a director of the Manager. The board further considered that it was not appropriate for Tin to continue to be a shareholder of the Manager and pursued means to divest him of his 20% shareholding in the Manager. The board also resolved to take all necessary steps to pursue claims on behalf of the REIT against Tin. 14.On 28 October 2007 the Manager made another public announcement reporting on the progress of the matter. The public announcement reported that the rental discrepancies were a complex and sophisticated fraud perpetrated by members of Tin’s team which was not detected by the Manager or its professional advisers despite a robust due diligence exercise. In addition to the rental shortfall (which was covered by the payment by Tin pursuant to the Letter Agreement), the independent valuer appointed by the Manager opined that the value of the Property would have been lower. The shortfall in the net assets attributable to the unit holders of the REIT was valued at $69,663,000. The Manager also referred to the costs and expenses incurred in addressing the fraud and discrepancies. Further, there were other items which the Manager decided to exercise its rights of set-off against funds held by the Trustee which would have been payable to Tin but for the set-off. Details of such items were set out in the public announcement. It was also announced that it had set off $174.4 million in those regards against funds payable to Tin. It also stated that it would continue to exercise its right of set-off in respect of further loss and additional expenses incurred by the REIT. 15.On 2 April 2008, the Manager made a public announcement of the final results of the REIT for the period from 22 June 2007 to 31 December 2007. In that announcement, the set-off exercised and to be exercised by the Manager in respect of the various sums payable to Tin were detailed in the notes to the account, in particular under note (i) in respect of adjustment to consideration[1] and under notes (i) to (iii) in respect of amount payable to the vendor[2]. 16.Similar notes appeared in the subsequent publications of annual results of the REIT. 17.Since October 2007, there was correspondence between solicitors for the REIT and solicitors for Tin on the claims of the REIT for breach of warranties on the part of Tin and the exercise of the right of set-off by the REIT. The only substantive response from Tin’s solicitors was set out in a letter of 24 June 2008 disputing that Tin had taken part in the scheme of rental discrepancies and alleging that the Manager had been in charge of the listing process and had better knowledge of the relevant facts. Apart from that, Tin did not dispute specifically the various items over which rights of set-off were exercised both in terms of liability and quantum. 18.In the meantime, there was litigation in the Second Intermediate People’s Court of Beijing in respect of the tenancy of Units B & C, 5th Floor, Tower B, Gateway Plaza leased to a company of Tin, Beijing Bestride Estate Development Co Ltd. That company defaulted in the payment of rent. Tin represented that company in the litigation and relied on the set-off exercised in the annual results of the REIT. Though the court found that there were defaults on the part of that company and ordered the delivery of possession of the units, in the judgment of 20 April 2009, it also accepted the plea of Tin on set-off having been exercised in respect of the arrears of rent and declined to make further order for payment of such arrears[3]. 19.In 2009 the Manager conducted a strategic review concerning the future of the REIT. As a result of the review, disposal of the Property was explored. On 3 February 2010, an agreement was made with a company Mapletree India China Fund Limited, for the sale of the Property to it. Approval of the unitholders for the sale was obtained at a meeting of 31 March 2010. The sale was completed on 12 April 2010 and interim distribution of the sale proceeds was made to the unitholders in May 2010. Thereafter, the delisting and termination of the REIT proceeded[4]. 20.In a public announcement of the 2010 Interim Results made on 20 August 2010 (which set out the accounts of the REIT up to 30 June 2010 after the disposal of the Property and the interim distribution), the account between Tin and the REIT was stated at Note 13[5] as follows,
21.After set-offs were exercised over the years (in the total sum of $276,597,000), the amount due to Tin was $10,900,000. 22.The same information was set out in the Annual Report of the REIT for 2010 and the Final Results Announcement (for 1 January to 21 December 2010) published on 21 March 2011 and subsequent Results Announcements. 23.In February 2011, the Trustee issued Order 85 proceedings in HCMP 242 of 2011 to seek the court’s directions for distribution of the entirety of the assets of the REIT without any retention to meet any possible claim from Tin by way of liquidation of the REIT. Tin was a defendant to that set of proceedings. Despite due service of the proceedings on Tin, he did not appear in person or through solicitors at the hearing on 31 May 2011 before L Chan J. On 30 June 2011, the judge handed down a judgment. He concluded that Tin had been fully informed of the set-offs and had Tin wished to challenge the same he should have commenced proceedings by then. He directed the distribution of the entirety of the net assets of the Trust without retention to meet possible claims by Tin. 24.Tin commenced the present action on 5 July 2011. 25.Tin’s appeal against the judgment of L Chan J in the Order 85 proceedings was dismissed by the Court of Appeal on 21 December 2011 in CACV 124 of 2011. The Court of Appeal took the view that the judge acted entirely properly in deciding the matter as he did. It also noted that it was not the position of any party that the determination in the Order 85 proceedings would relieve the Trustee or the Manager from Tin’s claim in the present action. 26.The present action was tried before Bharwaney J in the latter part of 2013 and early 2014. The trial commenced on 16 September 2013 and the hearing concluded on 24 January 2014. Further written submissions were filed on 25 April and 2 May 2014. The judge handed down his 139-page judgment on 15 February 2016. 27.In that judgment, the judge dismissed Tin’s claims save as to a judgment in the sum of $10,899,727 plus interest. 28.After considering the written submissions from the parties, the judge handed down a Decision on costs and interest on 10 May 2016. In that Decision, the judge apportioned 70% of the time spent, before and at trial, on Tin’s claims and 30% on the set-offs. He made absolute the costs order nisi that Tin should pay to the defendants the costs of the action incurred on his claims which were dismissed on an indemnity basis. He ordered Tin to pay 80% of the costs in respect of the set-offs of all the defendants on party and party basis. The grounds of appeal 29.In his skeleton arguments, Mr Barlow SC (leading Mr Chan Pat Lun, appearing for Tin) summarized his grounds of appeal (as set out in the Notice of Appeal of 14 March 2016) as follows:
30.We shall deal with these grounds below. At the appeal hearing, Mr Barlow attempted to raise a further point which had not been canvassed below and did not feature anywhere in the Notice of Appeal or his written skeleton. Counsel sought to argue that most of the set-offs made by the Manager should have been adjusted by the Auditors under para 7.3 of the SPA and by virtue of the finality of the Auditors’ Adjustment Statement there could not have been further set-offs after the Auditors had made the adjustment within the Adjustment Period. 31.This was not a point canvassed below and it was not foreshadowed in the written materials. Mr Barlow attempted to advance that argument in the course of his oral submissions without any prior notice to the Court or counsel for the other parties. It was highly unsatisfactory and unfair. We therefore invited counsel to identify clearly each item of set-off to which counsel’s argument applies and how such item related to the adjustments required to be made under para 7.3 before we could properly consider if such new point should be entertained. If the resolution of the point involved disputes of fact or reconsideration of the evidence, we should not permit it to be run for the first time in the Court of Appeal. 32.Unfortunately, despite time being given, counsel was unable to provide us with the necessary clarification. We therefore ruled on the second day of the appeal hearing that it was not open to Tin to rely on the new point as we would not grant leave under Order 59 Rule 3(3) for the point to be taken. 33.By a Respondent’s Notice of 19 April 2016, the Manager cross-appealed against the judge’s holding that the Manager was liable to Tin for the $10,899,727. In addition, the Manager also sought to uphold the set-off of the sum of $29,283,112 as legal fees, professional costs and investor relation costs in connection with the investigation and related work on an alternative ground. A. Delay in handing down judgment 34.There was a lapse of more than 1 year and 9 months after the last written submissions when the judgment was handed down. Irrespective of the complexity of the trial, a delay of such length in giving judgment is serious and unjustifiable. It is in the interest of justice that judgment is delivered promptly and delay would naturally give rise to concerns, particularly on the part of the losing party. It is also unfair to the winning party because he would have to wait for an unduly long period for the outcome and, if there were to be an appeal, he would need to defend a judgment which may be fraught with errors occasioned by the delay. 35.At the same time, the court must bear in mind that its ultimate function is to do justice between the parties and it is obviously unjust if a judgment is set aside simply on the ground of delay when there is no other discernible unfairness or error. That would be unfair to the winning party. Thus, to take an extreme example, in Ramnarine v Ramnarine [2013] UKPC 27, the Judicial Committee of the Privy Council refused to set aside a judgment delivered 4 years after the trial when the appellant failed to persuade the Board that there was any significant consequential error in the reasoning of the judgment. 36.It is well settled in Hong Kong (and this is not disputed by Mr Barlow) that whilst the appellate court will exercise a higher degree of scrutiny in respect of a judgment delivered after substantial delay, an appellant must show that the judgment contains errors before it will be set aside on appeal, see Mak Kang Hoi v Ho Yuk Wah (2007) 10 HKCFAR 552; Welltus Ltd v Fornton Knitting Co Ltd [2013] 5 HKC 106; Chow Sau Hei v Ho Keung Yuen CACV 112 of 2013, 7 July 2014; Dr Yip Chi Him Roger v Lee Kwok Leung CACV 174 of 2015, 14 Nov 2016. 37.Mr Barlow submitted that the delay in the present case had led the judge to make the Erroneous Fraud Finding and the Set-off Errors. We discuss these in the sections below. Mr Barlow further submitted that the judge failed to restrict the defendants to their pleaded cases, failed to hold the defendants to their evidentiary case in the witness statements and opening submissions as well as cross-examination. He also submitted that the judge failed to analyse, assess and adjudicate upon the evidence and overlooked his submissions relating to the set-off cases. Again these complaints would be addressed below in the context of the specific errors identified by Mr Barlow. Our overall conclusion is that there was no error in the judgment in any of these respects. 38.As we are not satisfied that the judge made any error, in accordance with the well settled principle stated above, we should not set aside the judgment simply on the ground of delay. B. Erroneous fraud finding 39.Mr Barlow submitted that the judge made a finding of fraud against Tin when the defendants did not plead any case of fraud (as required by the rule of pleadings, see ADS v Brothers (2000) 3 HKCFAR 70 at p.91H; Three Rivers District Council v Bank of England (No 3) [2003] 2 AC 1 at [184] to [186]) and there was no cross-examination against Tin in respect of his approval of or personal involvement in what the judge referred to as the False Documentation Scheme, viz the scheme of discrepant rental information provided to the defendants (as required under the rule of Browne v Dunn (1894) 6 R 67). He further contended that the evidence did not meet the high standard for a finding of fraud against Tin (as mandated by Ribeiro PJ in Ming Shiu Chung v Ming Shiu Sum (2006) 9 HKCFAR 334 at [78] to [80])and the judge failed to identify any primary facts (other than the financial advantage of the scheme to Tin) to support the inference of fraud. He said the allegation of Tin having perpetrated a fraudulent scheme was only made by counsel for the Manager in his closing submissions and Tin did not have any opportunity to defend himself against such imputation. 40.The relevant findings by the judge were at section 3.4.5 paragraphs 167 to 178 of the judgment. The personnel directly involved was an employee of Tin known as Yuan. The judge said this at paragraph 178,
41.In light of the submissions of Mr Barlow, it is necessary to consider the pleadings and how the respective case of the parties was presented at the trial at some length. 42.In the pleadings, it was Tin who put his knowledge of the discrepancies in rental information into issue. At paragraph 45 of the Statement of Claim, Tin averred that the Deutsche Management Demand around 20 August 2007 (pleaded at paragraph 44) was “the first suggestion to [Tin] that there were any differences between the rentals that had been declared in the pre-listing documents and the actual rentals being received from the tenants of the Property”. 43.The significance of this plea should be considered in light of these claims advanced by Tin against the Defendants in the Statement of Claim.
44.As noted by the judge at paragraphs 117 and 119 of the judgment, Tin abandoned the case of the 1st defendant advising his staff to pursue the Revenue Enhancement Scheme. For the reasons given by the judge at paragraph 118 of the judgment, that claim was demonstrably disingenuous. 45.Had Tin been aware of the discrepancies at a time prior to the execution of the SPA, he could not possibly pursue any of these claims particularly after he had abandoned his case on the 1st and 2nd defendants’ involvement and knowledge of the scheme. In other words, his lack of knowledge was essential to the case he ran at the trial that he had not committed any breach of warranties and that the 1st defendant acted negligently in performing its duties towards him in the listing process. Nor could he claim any loss and damages arising from his execution of the Letter Agreement (since he would have been liable to compensate the REIT for the rental discrepancies in any event). 46.The plea of lack of knowledge on the part of Tin was disputed by the defendants on the pleadings, see paragraph 45 of the Defence of the 1st and 2nd defendants. 47.Hence, on the pleadings, the knowledge of Tin on the False Documentation Scheme was an issue. It is also plain from the judgment that Mr Barlow, also representing Tin at the trial, was aware that this was a live issue and he made submissions to the judge on the same, see paragraphs 167 and 168[9], and evidence had been led on that issue, see paragraphs 169 to 176. 48.It is also quite plain to us in section 3.4.5 of the judgment, the judge addressed this issue and this issue only. The judge did not take the extra step of making a positive finding of fraud or fraudulent intent on the part of Tin. It was not necessary for the judge to do so and he carefully confined himself to the issue which he needed to resolve. 49.In such circumstances, we are not impressed by Mr Barlow’s attempt to elevate this section of the judgment to a positive finding of fraud against Tin in order to support his self-induced challenge based on lack of pleadings of fraud. 50.Mr Barlow’s submission based on the breach of the rule in Browne v Dunn is equally unmeritorious. Mr Wong Yan Lung SC, leading Mr Mike Lui for the Manager, referred us to the relevant parts of the cross-examination of Tin at the trial in his skeleton submissions at footnote 3[10]. We have read those transcripts and we are satisfied that Tin was given ample opportunity to refute the suggestion that he actually had knowledge of the False Documentation Scheme. Again Mr Barlow was quite alive to such cross-examination because he as trial counsel addressed the court below in his closing submissions on the topic at paragraphs 3.10 to 3.12[11]. 51.We are also satisfied the matters identified by the judge at paragraphs 169 to 178 of the judgment had been adequately drawn to the attention of Tin and Mr Barlow during the course of the trial and they had a fair opportunity to answer the same. 52.The judge reminded himself of the requirement as to the cogency of evidence in proving serious allegations at paragraph 177 of the judgment. Reference was made to Akai Holdings Ltd v James Henry Ting HCCL 42/2005, 16 Dec 2015 at paragraphs 62 to 69 where the relevant principles and authorities cited by Mr Barlow in this appeal on this issue were discussed. There is no basis for this Court to find that the judge committed any error in the approach on weighing the evidence as to the knowledge of Tin. 53.Contrary to the submissions of Mr Barlow, the judge set out the primary facts based on which he drew the inference that Tin had knowledge of the False Documentation Scheme in the judgment,
54.In our judgment, the inference drawn by the judge as to Tin’s knowledge had solid foundations and Mr Barlow came nowhere near the threshold for an appellate court to disturb a finding of fact of the trial judge. Actually, instead of being plainly wrong, we are of the view that the judge’s finding was plainly right. 55.In the Notice of Appeal, sub-para (2) in Ground 2 referred to the refusal of the judge to allow the Beijing witnesses (including Yuan) to give evidence by videolink. We read that sub-para as a preamble to the substance of Ground 2, which was set out after sub-paras (1) to (6), instead of a separate independent ground of appeal. In his written and oral submissions, Mr Barlow did not advance that sub-para as an independent ground of appeal before us. In the circumstances, we need not dwell on it. Suffice to say that it was clearly a case management decision by the judge and Mr Barlow did not present any viable ground for challenging the same. 56.As submitted by Mr Wong, as Tin did not appeal against the dismissal of his claims based on breach of duties and the 1st and 2nd defendants’ lack of knowledge of the scheme, this ground has no bearing at all on the real merits of the appeal as the finding of knowledge of Tin only had bearing on such claims. In the course of hearing, Mr Barlow also accepted this to be the case though he told us that Tin had a concern over the imputation of fraud against him. 57.In light of what we said above, Tin’s concern is misplaced and the appeal based on this ground is wholly devoid of merit. C. The primary liability of the Manager and the Trustee 58.Originally, Mr Barlow advanced this part of his submissions by reference to Grounds 4 and 5 in the Notice of Appeal, see paragraphs 8 to 10 of his skeleton submissions of 28 March 2017. The main point, according to counsel, was that the judge did not require the Manager to account for the balance of the $278 million odd paid under the Letter Agreement. 59.However, on the second day of the hearing before us (10 May 2017), in the course of his submissions in the morning, he accepted that he could not pursue the appeal in respect of item (e) in his written summary of the claim placed before us on 9 May, viz the sum of $54,413,340 alleged to be the balance due from the maximum amount which could be certified for payment under the Letter Agreement as Tin could not demonstrate that there was such a balance. Mr Barlow indicated that he would confine himself to items (1) to (4) in Ground 4 of the Notice of Appeal. 60.That concession effectively amounted to the abandonment of the Quistclose trust argument (which was confined to the alleged balance in the Notice of Appeal). 61.As for the other items, the real issues are whether the set-offs already made were valid and properly certified and whether Tin’s entitlement to dividends had been waived. We shall discuss these issues below. D. The dividends errors 62.Dividends were payable to Tin as the sole shareholder of Beijing Gateway which, as we have said, was the parent company of Hong Kong Gateway which became the owner of Gateway Plaza after its construction. The dividends were payable to Tin for the year ending 31 December 2006 and represented the declared profits of Beijing Gateway sourced from rentals received by the company in 2006. 63.The evidence of Paul Keogh was that this sum was initially treated as potentially payable to Tin against which set-offs could be exercised. However, subsequently, Tin’s entitlement to this money was regarded as having been irrevocably waived by him pursuant to clause 9B of the SPA and thereafter ceased to be an amount to which he was entitled. 64.Clause 9B of the SPA provided:
65.The factual basis for the trigger of the waiver was set out in the evidence of Keogh. He explained that in order for the money to be eligible to be repatriated to Hong Kong where it could be distributed, the rental income would have to be declared to the Mainland tax authority and tax paid on it. Once this was done a tax clearance certificate would be issued and the money could then be repatriated to Hong Kong. However, the Manager was unable to get the tax clearance certificate and so the money could not be repatriated. It was in those circumstances that the Manager invoked clause 9B. 66.Keogh pointed to a number of documents where requests had been made for the documents needed to repatriate the money but that no such documents were forthcoming. 67.In the absence of any evidence from Tin to contradict Keogh’s claim that it was impossible to repatriate the money without the tax clearance certificate, the judge found that “the Manager was entitled to and rightly asserted that Tin’s entitlement to the HK$50 million dividend has been irrevocably waived pursuant to clause 9B of the SPA.” 68.In his sixth ground of appeal in relation to this amount of money Tin complains that no defence of waiver had been pleaded, no claim of waiver had been put to Tin by the defendants’ counsel in his cross-examination of Tin and the defendants did not adduce any evidence of waiver and specifically did not adduce evidence of having unsuccessfully attempted to repatriate the monies to Hong Kong and that the monies had not been in Hong Kong since 2007. Finally, it is said that Tin having formally demanded payment of this sum, amongst others, since 12 June 2009, the defendants should have made payment accordingly. 69.Mr Barlow submitted that a defence of waiver has to be specifically pleaded and that included pleading the factual basis of the defence. He argued that in order to invoke the clause the Manager and Trustee had to plead and prove that the monies could not be repatriated and, in fact, were not repatriated. In support of this argument he relied on the comments of Ma CJ in Kwok Chin Wing v 21 Holdings Ltd[12] on the purpose of pleadings and the importance of ensuring that any issues raised in the witness statements are properly pleaded. 70.Mr Barlow complained that that there was nothing in the defendants’ witness statements in relation to the waiver and this was the basis of an objection he made in the course of Keogh’s examination-in-chief. 71.Mr Barlow also repeated an argument he had unsuccessfully advanced before the judge which was that clause 9B could not be lawfully invoked unless the purported invocation was accompanied by a certificate from an auditor and here there was no such certificate. In this respect he said the cut-off date for the purposes of clause 9B was 2 May 2008, 30 days after the auditor’s report which was dated 2 April 2008. 72.In responding to paragraph 80 of the SOC, which set out sums that the plaintiff averred were retained by the Trustee for and on behalf of the REIT, the Manager said in its defence:
73.The judge found that this was an assertion of waiver by the Manager and in our view he was right to do so. This was a proper pleading of the defence of waiver. As to the sufficiency of the pleading we are satisfied that it more than meets what is required by legal authority. 74.The pleading reveals that the basis of the waiver is clause 9B of the SPA. That clause spells out the facts that have to be established in order to trigger the operation of the clause. They are:
75.Once these facts are proven then the waiver provision is triggered and a deemed waiver takes place, but only to the extent of any unrepatriated profits. The waiver provision is, in fact, self-explanatory and provides sufficient factual particulars for the purpose of pleading the waiver defence. 76.Mr Barlow’s argument that clause 9B cannot be invoked without the support of an auditor’s certificate is misconceived. Properly construed, clause 9B consists of two elements. The first element is a deemed waiver provision which is triggered on the happening of those events set out above. 77.The second element is a confirmation by the vendor that any amount of profits of the HK Property Company not repatriated shall reduce the amount of dividend declared and unpaid by the BVI Property Company. It is only this second element which requires certification by the auditors. 78.Finally, Mr Barlow argued that as the audited accounts of the REIT for every year to 2013 recorded the Trustee as holding an amount of HK$114,955,000 which was due to Tin and as it was not disputed that this amount included the dividends of HK$50 million, there was clear evidence that the waiver had not taken place. 79.However, Mr Barlow’s submission is contrary to the evidence. It is clear that as early as 5 October 2007 Keogh was corresponding with James Wong, Tin’s assistant, on obtaining tax clearance certificates from the Beijing tax authorities. Mention was also made of it in the Final Results Announcement for the period up to 31 December 2007. Note 11 of that announcement is headed “Amount due to the Vendor” and under paragraph (ii) there is reference to HK$50,000,000 declared dividend of BVI Gateway which is then followed by the statement:
80.It is also referred to in a letter dated 12 June 2008 by the Manager’s solicitors, Messrs Clifford Chance to Tin’s solicitors, Messrs Ford Kwan & Company. The letter from Clifford Chance referred to the failure by Tin to provide the documents set out in Appendix 4 to their letter. Paragraph 5 of Appendix 4 described these documents as:
81.There was continuing correspondence by Clifford Chance in an attempt to resolve all the various tax issues but ultimately no documentation was provided which proved that the tax liabilities had been paid. The correspondence culminated in a letter of 5 July 2010 by Clifford Chance to Ford Kwan & Company in which Clifford Chance provided Ford Kwan & Company with a progress report on the process of liquidating the Trust. This letter informed Ford Kwan & Company that it was intended that there would be a final distribution to unit holders in November 2010 and
82.The assessment of HK$11 million obviously took into account the waiver of the HK$50 million so on receipt of this letter Ford Kwan & Company must have been aware that the unpaid dividends were not going to be included in Tin’s final distribution. This is also clear from the notes to the 2013 Interim Report where it is made clear from the amounts set off that the figure must include the HK$50 million. 83.We are satisfied that the waiver provision was properly and sufficiently pleaded, the evidence established the factual foundation for its trigger and the evidence also established that the unpaid dividend monies were treated as having been waived by Clause 9B. The judge was correct to find that, pursuant to the clause, the HK$50 million was deemed to have been waived. E. The set-off errors 84.Before we deal with Mr Barlow’s arguments regarding set-off generally and in respect of individual items, it is important that we put matters in the proper context with regard to non-controversial facts and/or facts as found by the judge. 85.Following the discovery of the fraud by the Manager in August 2007, successive public announcements were made on 10 September 2007 and 28 October 2007. The first announced that Tin had paid into the account of the Trustee $278,526,708 on an unconditional basis, to meet the anticipated shortfall of rental revenue by reason of the discrepancies identified. The latter dealt with other heads of losses. It was announced that the shortfall in net assets attributable to unit holders of $69,663,000, together with the cost and expense incurred by the Manager in addressing the fraud and discrepancies, would be covered by funds that might otherwise potentially be owing to Tin but under the control of the Manager, or by the retention sum held by the Trustee pursuant to the Sale and Purchase Agreement. 86.From October 2007, Tin was provided with notification of the anticipated and actual exercise of set-offs by a series of letters from the Manager’s solicitors, Clifford Chance, to his solicitors, Ford Kwan. Further, the set-offs had been publicly announced in the annual and interim results of the Trust and the annual reports from 2008 to 2011[13]. The total amount set off from 2007 to 2010 was $276,596,671[14]. 87.Tin never made any substantive reply or objection to the set-offs. He merely asserted in two short letters from his solicitors he disputed all set-offs in June 2009 and demanded repayment of $287,497,000 in May 2010. As no action was taken by him, in February 2011, the Trustee applied to court under Order 85 rule 2 for an order it could proceed with the distribution of the entirety of the net assets of the Trust without retention to meet any possible claim Tin might make against the Trust. The High Court granted the application in June 2011. Tin’s appeal was dismissed by the Court of Appeal in December 2011. Having done practically nothing for nearly four years to challenge the set-offs despite ample notice since October 2007, he brought this action in July 2011, apparently to justify his appeal against the Order 85 rule 2 order[15]. 88.The claims in this action were firstly a massive claim for damages for intimidation, deceit and misrepresentation, breach of warranty, contractual and statutory duties, unlawful confiscation of Tin’s 20% shareholding in the Manager. These claims were all dismissed by the judge[16], for which there is no appeal. Indemnity costs for that part of the action were awarded against Tin. 89.The other substantial claims in this action were for: (1) the balance of the price payable by the Trustee under the Sale and Purchase Agreement ($270,955,000[17]); and (2) the balance of the sums refundable to Tin by the Trustee and/or the Manager ($289,426,166[18]) plus $16,541,458[19]. Three things should be noted about these claims. 90.First, before this action was commenced, set-offs had already been exercised by the Manager against the sums which made up the claim in (1). In advancing such claim in (1), what Tin was clearly seeking to do was to impeach the set-offs already made. 91.Second, in respect of the claim in (2), Tin sued for the balance due to him, after contractual set-offs of $276,597,000 were made[20]. 92.Third, Tin’s pleaded basis for impugning the set-offs was that they were not certified by the Manager or the Trustee[21] or not validly certified in that the provision for certification of losses only permitted certification “if in fact the REIT has suffered actual losses”[22] and “the REIT has suffered no such losses”[23], because there was no material breach of warranties as each of the Bank and the Manager was aware of the rental discrepancies[24]. It was not his pleaded case that any of the set-offs was not incurred, or that the amount set off was unreasonable or was wrong in fact or in law for any specific reason. 93.It was only in Mr Barlow’s opening submission at trial[25] that for the first time he put the Manager and the Trustee to strict proof of the set-offs, relying on §2 of the Reply that Tin had joined issue with the Defences of the Manager and the Trustee. E.1 Pleading objections 94.Mr Barlow raised a pleading objection. 95.He asserted that the set-offs relied on by the defendants were in the nature of legal set-offs, as it was mentioned by the judge that the issue he was dealing with was “whether or not the Bank, the Manager and the Trustee were legally entitled to exercise the set offs against Tin that they have pleaded in order to reduce the amounts owing to Tin.”[26] (emphasis supplied) On that basis, he advanced these legal propositions:
96.He contended that the Manager and the Trustee had not pleaded any positive defence of set-off. The “fait accompli set off pleas” in the Defences were devoid of any pleaded facts capable of constituting a counterclaim, or any plea of specific transactions capable of founding a counterclaim, or any indication as to how the alleged set-offs had been formulated or quantified. And there was no alternative or fall-back plea by the defendants that each of the amounts set off can be sufficiently proved. So it was not open to the defendants to search for evidence at the trial or to seek to rely on evidence identified in their closing submissions or for the judge to find on the evidence that the set-offs were sufficiently proved. 97.Mr Barlow’s submissions are misconceived and wholly without merit. 98.The set-offs relied on by the defendants were clearly not legal set-offs. We do not understand the judge to have suggested otherwise. It is simply wrong to equate legal entitlement with legal set-off. The fact that the judge did not deal with the arguments made to him on the nature of the set-offs is immaterial. In a judgment of 139 pages of a lengthy trial, we do not expect the judge to deal with each and every argument advanced by counsel. 99.The passages in the authorities particularly relied on by Mr Barlow all relate to legal set-offs. They have no application here. We are just not concerned with a situation in which a defendant is sued for a sum and seeks to raise for the first time by way of defence and counterclaim “cross-claims” to reduce or extinguish the plaintiff’s claim. The sums were all set off prior to the commencement of this action by the defendants invoking their contractual rights under the Sale and Purchase Agreement and other transactional agreements. They were not independent and procedural cross-claims raised for the first time as a defence to Tin’s claims (categorised as “independent” or legal set-offs in the authorities) but they arose out of the same transaction and operated as a complete or partial defeasance of Tin’s claim for the outstanding balance in the same transaction (categorised as “transaction” or equitable set-offs). This was not a case of cross-demands, but rather of calculating the true measure of damages, where the damages payable by Tin to the Manager were reduced because of a benefit incidentally accruing to the Manager as a result of Tin’s breach (Derham on the Law of Set-off (4th ed) p 1). 100.An independent or legal set-off is a remedy available only in judicial proceedings; it enables a defendant to require his cross-claim, even if based on a wholly different subject matter, to be tried together with the plaintiff’s claim and in this way ensures that judgment will be given simultaneously on the claim and cross-claim, thereby relieving the defendant from having to satisfy the judgment before his cross-claim has been determined (Stein v Blake, at 251C to D). A transaction or equitable set-off has the status of a self-help remedy and arises where the relationship between the claims is such that equity insists that the one should operate in defeasance of the other (Fuller v Happy Shopper Markets Ltd [2001] WLR 1681, §§22, 23 and 26). The distinction cannot be clearer. 101.As it is Tin who was seeking to impugn the set-offs already made, it was incumbent on him to plead specifically the ground or grounds relied on to invalidate the set-offs he pleaded in the Statement of Claim at §§81 and 82. A general joinder of issues in the Reply could not have provided a proper basis for Tin to launch positive attacks on the validity or propriety of the set-offs, other than the case pleaded in the Statement of Claim relating to the certification of losses and no actual losses suffered by the Trust. 102.The judge did not confine Mr Barlow to his pleaded case. He was permitted to cross-examine witnesses and advance arguments on specific matters notwithstanding a positive contrary case had not been pleaded. We do not need to go further into this as there is no challenge to this in the respondent’s notice. He could have no cause for complaint about the sufficiency of pleadings when his own Statement of Claim failed to put forward a positive case to impugn the set-offs (other than certification and no actual losses suffered) and the Defences of the Manager and Trustee were made in response to his case as pleaded. 103.In any event, we do not think the set-offs as pleaded in the Defences[27] were in any way inadequate. As mentioned earlier, Tin had been provided with detailed notifications and information about the set-offs over a period of almost four years before he brought this action. And as Bowen LJ had stated in Ratcliffe v Evans [1892] 2 QB 524 at 532 to 533: “As much certainty and particularity must be insisted on, both in pleading and proof of damage, as is reasonable, having regard to the circumstances and to the nature of the acts themselves by which the damage is done. To insist upon less would be to relax old and intelligible principles. To insist upon more would be the vainest pedantry.” Having regard to the circumstances under which the set-offs were carried out and notified to Tin through his solicitors as well as publicly, it could not be seriously suggested that Tin was in any way taken by surprise by the reason and amount of each of the set-offs. There is no reason to think that the pleadings in relation to the set-offs by the defendants were deficient. 104.We reject also the argument that as the defendants had not advanced an alternative or fall-back plea that each of the amounts set off could be sufficiently proved, they should not be allowed to adduce evidence on this, nor was it open to the judge to find in their favour. If any party had a justifiable complaint here, it would be the defendants rather than Tin. As mentioned earlier, Tin should not have been allowed to launch positive attacks on the set-offs when he had not pleaded a positive contrary case. Mr Wong is justified in saying that if Tin had made a proper challenge regarding the set-offs in the Statement of Claim, he could have responded to this not only in his pleading, but in the witness statements and in giving discovery. As things turned out, he had to ask his witnesses to elaborate on the set-offs in their evidence in chief, and Mr Barlow was permitted to cross-examine at length on unpleaded matters. There is no unfairness to Tin. E.2 Objections to evidence 105.Mr Barlow raised a number of objections regarding the evidence adduced. 106.First, he complained that the defendants did not put to Tin during cross-examination their factual or evidentiary cases as to their alleged entitlements to set off. Nor did the defendants open their case on the subject. Tin was not given any chance, prior to or during the trial, to rebut the allegations on the set-offs. Further, as the defendants were relying on voluminous documentary evidence, they should have timeously directed the court, the opposite party and the relevant witnesses of the other side to any relevant documents they were to rely on in support of their case in set-off. 107.There is no merit in any of the above contentions. The rule in Browne v Dunn (that if a party wishes to suggest the evidence of a witness is wrong for some reason, procedural fairness requires that the witness should have his attention directed to it by questions put in cross-examination and be given a chance to explain) would have no application in this situation. As mentioned earlier, Tin had been notified repeatedly of the nature and amount of each of the set-offs and it was he who was seeking to impugn the set-offs already made. He pleaded no positive contrary case, and chose not to adduce evidence to challenge the set-offs at all. It lies ill in his mouth to complain that he was not given forewarning and a chance to rebut the allegations on the set-offs. 108.Second, Mr Barlow submitted that the judge had erred in law in relying on inadmissible expert evidence being the annual reports and final results announcements of the Trust containing the hearsay opinion and past reports of KPMG as the auditors of the Trust, and the valuation reports of DTZ. Expert opinion evidence may not be adduced unless and until the requirements of Order 38 are complied with. No leave to adduce expert evidence had been sought or given. He cited Savings and Investment Bank v Gasco Investments BV [1984] 1 WLR 271 at 279G to 280B, in which Peter Gibson J held that a report compiled by inspectors appointed by the Secretary of State for Trade to investigate a company containing statements of their opinion was not admissible in evidence. 109.The above argument must be rejected. Savings and Investment Bank was decided in the context of Order 41 rule 5(2)[28], and is of no assistance to Mr Barlow. Neither KPMG nor DTZ was “an expert who has been instructed to give or prepare evidence for the purpose of proceedings in the Court” (Order 38 rule 35(2)), so Order 38 has no application here. The consolidated financial statements and the valuation reports formed part of the historical records prepared by KPMG as the independent auditor and DTZ as the independent valuer in discharge of their duties under the Code on Real Estate Investment Trusts (“REIT Code”) issued by the Securities and Futures Commission. As submitted by Mr Wong, these reports were referred to for the purpose of explaining the past decisions of the Manager and the Trustee, to show how the losses suffered by the Trust were crystallised, and to show due process had been performed before the relevant decisions were made. 110.The annual and interim results and annual reports were published by the Manager as part of the operation and management of the Trust pursuant to the REIT Code, which was under the close scrutiny of the Hong Kong Stock Exchange and the Securities and Futures Commission. The importance of the financial statements lay in the fact that the set-offs had been subjected to an independent audit and KPMG was satisfied from the audit evidence to say that the financial statements gave a true and fair view of the disposition of the assets and liabilities of the Trust. 111.The post-September 2007 valuation reports of DTZ set out their opinion of the market value of the Property in compliance with the requirements in Chapter 6 of the REIT Code. This was to enable the Manager to discharge its reporting duties to the unit-holders and the public pursuant to the REIT Code, in particular to inform the investing public of material changes affecting the value and financial forecast of the Trust. The valuation of DTZ of the market value of the Property as at 30 September 2007 was endorsed by two other independent valuers, Colliers and Savills. 112.Mr Barlow made no objection to the admissibility of these reports as expert evidence, prior to his closing submission at the trial. Instead, he relied on the DTZ valuation reports heavily to cross-examine Paul Keogh, the former executive director of the Manager. His belated objection is entirely without merit. 113.Third, Mr Barlow complained that the judge was wrong to admit “unheralded and inadmissible oral hearsay evidence” of Keogh, which was led during his examination in chief when no such case had been put to Tin during cross-examination, after Tin had completed his evidence and closed his case, and the specific relevance of which was only first outlined in the Manager’s closing submissions. 114.This complaint must be considered against the proper context as already mentioned. As with the complaint about the pleadings, it cannot fairly be said that Tin was taken by surprise about the details of the set-offs, in view of all the communications made by the Manager’s solicitors to his solicitors as well as publicly. We do not think Tin was ambushed at the trial. 115.Our attention was drawn by Mr Wong to certain parts of Keogh’s evidence objected to by Mr Barlow[29], on the ground that it was not set out in the witness statements. The judge had ruled against him and indicated that he would hear submissions if Tin was in any way prejudiced. No submissions of prejudice were made. 116.Besides, allowing a witness to amplify on his witness statement is a case management decision of the trial judge. In accordance with well-established principles, the appeal court has no basis to interfere unless the decision was plainly wrong or that it was outside the generous ambit within which a reasonable disagreement is possible. 117.We reject also Mr Barlow’s contention that the defendants’ evidence in support of the set-offs was “self-serving”. The judge was fully entitled to accept the evidence of Keogh and Andrew Law, the chief executive officer of the Trustee, and give such weight to their evidence as appropriate. 118.We turn to consider the individual items of set-offs challenged on appeal. Mr Barlow repeated his general attacks on the pleadings and the evidence in dealing with the individual items. We do not propose to deal with the general attacks again, which we have rejected for the reasons given above. 119.The judge had proceeded on the basis as contended by Mr Barlow that the defendants should have the onus of proving the set-offs. After considering the evidence and submissions, he concluded that the onus was discharged. He found three set-offs proved based on the conclusive evidence clause in the Letter Agreement of 7 September 2007 and/or clause 9.1A of the Sale and Purchase Agreement (the diminution loss of $69,663,000; the legal fees, professional costs and investor relations costs of $29,383,112; and loss in the Manager’s fees of $5,471,682)[30]. He found the remaining six items proved on the evidence (loss of rental under the advertising right agreement guaranteed by Tin of $41,171,392; irrevocable rental receivables collected by Tin and amount due from a related party owned by Tin of $20,039,341; expenses related to defective equipment of $19,874,750; listing expenses of $1,102,177; rental receivables, unpaid management fees, unpaid double holdover rent and reinstatement costs due from Tin’s affiliates of $32,857,825; and stamp duty, urban real estate tax and related penalty interest of $7,033,392)[31]. 120.As pointed out by Mr Eugene Fung SC for the Trustee, the general objections taken by Mr Barlow, as well as the challenge on individual items, were by and large repetitions of unsuccessful submissions made to the judge. Instead of identifying palpable errors in the judgment that are sufficiently material for the appeal court to intervene and explaining why the judge went wrong, we were repeatedly directed to Mr Barlow’s written closing submissions at trial with mere assertions that the Judgment was incorrect. This is a misuse of the appellate process. E.3 Diminution in the net asset value of the Property 121.The judge found that the diminution in the net asset value of the Property ($69,663,000) was a loss suffered by the Trust in addition to the rental income loss ($278,526,708) and did not amount to double recovery. He concluded that the public announcement of 28 October 2007, the final results announcement up to the period of 31 December 2007 and the annual report 2007 were all certificates within the meaning of the Letter Agreement of 7 September 2007 and were conclusive and binding on Tin[32]. In any event he was satisfied on the evidence that $69,663,000 was the diminution in the net asset value of the Property suffered as a result of Tin’s breach of the Sale and Purchase Agreement and/or the discrepancies or potential discrepancies of the terms of the tenancy agreements stated in the Sale and Purchase Agreement[33]. 122.Mr Barlow repeated his submission below that the claim for diminution in the net asset value of the Property was contrived in that it was not based on any actual loss as the Property had not been sold at the time DTZ made their valuation on 23 October 2007 (adopted in the final results announcement for the latter half of 2007) and the Property had not lost any of its value. Further, on 31 December 2008, DTZ valued the Property as having monthly rentals higher than the valuation monthly rentals in June 2007, and, by the payment of $278,526,708, Tin had ensured that the defendants received the warranted higher rentals. Therefore, it was argued that the defendants had suffered no loss which could be raised as set-off. 123.The attacks on whether the documents relied on by the defendants could constitute certificates will be addressed separately in another part of this judgment. 124.We reject the argument there was double recovery. The diminution in the net asset value of the Property was incurred because the Property was only able to generate the low rentals, not the high rentals, and therefore it was worth less. This diminution in value was in addition to and after taking into account the payment of $278,526,708, which was to cover rental shortfall under current leases. The judge had identified the relevant evidence in §§200 and 201 of the Judgment. 125.The argument that the Trust suffered no actual loss because the Property was not sold in September 2007 or at all is misconceived. As confirmed by Keogh in cross-examination[34], the units of the Trust were traded on a daily basis and the unit price would need to be a reflection of the net asset value of the Property. It was not a theoretical or paper loss. The loss caused by Tin’s breach of warranty was the difference in value between what was warranted and the true worth at the time of breach in September 2007, and this loss was set off in 2007. Any subsequent rise and fall in the market and the ultimate resale price were irrelevant. E4. Liability for lost advertising rentals 126.By clause 9A of the Sale and Purchase Agreement, Tin guaranteed the payment of the relevant rentals under the advertising right agreement entered into by the grantee Beijing Shenmingda. The grantee failed to pay the rent due in the sum of $82,171,392. As $41 million was subsumed within the calculation for loss of the net asset value of the Property, the Manager only claimed the balance of $41,171,392 by way of set-off.[35] The judge rejected Mr Barlow’s argument that there was frustration of the advertising leases by Article 9 of the Norms Concerning the Configuration of Outdoor Advertisements issued by the Beijing Municipal Administration Commission, which was promulgated after the Sale and Purchase Agreement in anticipation of the Beijing Olympics[36]. 127.Mr Barlow complained the judge did not pay sufficient regard to his case and reiterated that as the grantee had no performable primary obligation, Tin had no surety’s obligation to the defendants. He did not explain why the judge was plainly wrong. 128.We agree with the judge there was no evidence that the grantee had sought to invoke any “force majeure” provision in the advertising right agreement to be released from its obligation to pay advertising rentals. We also agree with the judge that in construing the guarantee in clause 9A, the guarantee should not be construed as liable to be invalidated upon the exercise of a “force majeure” provision in the advertising right agreement, having regard to the fact that the advertising tenant formed a significant part of the revenue of the Property at the time of acquisition, and materially influenced the valuation and the consideration received by Tin. E5. Irrevocable rental receivables collected by Tin and amount due from a related party owned by Tin 129.The complaints here were that the judge accepted the oral evidence of Keogh (which was not in his witness statements, and described by Mr Barlow as hearsay and self-serving), the consolidated accounts (contended as containing inadmissible expert evidence) and the payment instructions of the Manager (described by Mr Barlow as self-serving and only belatedly identified in the closing submission). 130.There is no need to deal with these complaints separately again. E6. Expenses related to defective equipment 131.The judge was satisfied from the documentary and oral evidence of Keogh that Tin was in breach of the warranties in the Sale and Purchase Agreement relating to the equipment in the Property and the licences relating to the equipment. Further, he was satisfied that $19,874,750 or the equivalent in RMB was properly set off as expenses to render the equipment in good repair and condition and compliant with licensing requirements[37]. 132.Mr Barlow submitted the judge had overlooked or ignored his submissions below that the payment instructions relied on by the Manager were “self-serving” and belatedly identified only in the closing submission and there was no evidence of the exchange rate of RMB to HK dollars for the relevant dates. 133.The judge had considered and analysed the relevant evidence in §§226 to 231 of the Judgment. Mr Barlow had not come close to showing that the judge’s finding that the losses were proved was palpably wrong. The complaint now made regarding the exchange rate for the relevant dates has no merit. The judge had expressly ruled on the alternative of set-off in RMB in §231. E7. Listing expenses 134.This is another complaint that the submissions of Tin below were not addressed and that the Manager’s payment instructions were “self-serving” and insufficient to establish the set-off claimed. 135.There is no substance in this complaint. There is nothing to indicate that the finding on the evidence at §§232 to 234 of the Judgment was plainly wrong. E8. Legal fees, professional costs and investor relations costs 136.This claim was made by the Manager pursuant to the Letter Agreement of 7 September 2007 for costs incurred arising out of Tin’s breach of the Sale and Purchase Agreement and/or the discrepancies or potential discrepancies of the terms of the tenancy agreements stated in the Sale and Purchase Agreement. The judge held that the final results announcement up to the period 31 December 2007 was a certificate within the Letter Agreement and was conclusive and binding on Tin[38]. In the event he was wrong about that, he would find that he was satisfied on the evidence that the amount of $29,383,112 was expended as legal fees, professional costs and investor relation costs but he did not think the evidence was sufficient to determine whether they were properly incurred[39]. 137.The same complaint was made that the judge had accepted “self-serving” evidence and there was lack of source documents such as invoices or fee notes. 138.We see no basis to interfere with the judge’s finding he was satisfied on the evidence that the expenses were incurred. We do not think the statements in Target Holdings Ltd v Redferns [1996] 1 AC 421 at 432E to F would advance Mr Barlow’s arguments. As to the holding that the evidence was insufficient to establish if the expenses were properly incurred, this is the subject of the respondent’s notice of the Manager. It would not be necessary to deal with this if we should uphold the conclusiveness of the certificate. We will deal with the issue about the certificate in the latter part of this judgment. E9. Loss in the Manager’s fees 139.This item was held by the judge to be covered by certificates, being the final results announcement up to the period 31 December 2007 and the annual report 2007[40]. The judge went on to find that if he was wrong about the certificates, the evidence was sufficient to find that $5,471,682 was the loss of the manager’s fees suffered as a result of Tin’s breach of the Sale and Purchase Agreement and/or the discrepancies or potential discrepancies of the terms of the tenancy agreements stated in the Sale and Purchase Agreement[41]. 140.The issue relating to the certificates will be dealt with subsequently. 141.Mr Barlow argued that this claim lacks the requirement of mutuality for set-off. We reject this argument as this was not a legal set-off, for the reasons given earlier. 142.As for his arguments about “self-serving” statements and hence the insufficiency of the evidence, we reject them for the same reasons mentioned above. E10. Rental receivables, unpaid management fees, unpaid double holdover rent and reinstatement costs due from Tin’s affiliates 143.There is plainly no basis to challenge this item. The Manager had brought eviction proceedings in the PRC and Tin defended on the basis that although he agreed to pay the sums due from his affiliates on their behalf, the sums claimed had been set off by the Manager in Hong Kong[42]. Upon re-taking possession, the Manager incurred substantial reinstatement costs. The judge was satisfied on the evidence the reinstatement costs as claimed were incurred[43]. We reject Mr Barlow’s contention about the requirement of mutuality as these were not legal set-offs. E11. Stamp duty, urban real estate tax and related penalty interest 144.The judge was satisfied on the evidence that the total amount set off was for tax underpayment and penalty interest and Tin was liable to indemnify the defendants[44]. Mr Barlow’s challenges were premised on his objections on pleadings and evidence which we have already dealt with. F. The lump sum balance errors 145.The grounds of appeal under this heading concern the monies tendered by the plaintiff when he signed the letter of 7 September 2007. The grounds assert that Tin is entitled to the repayment of the HK$278,526,708 on the basis that:
146.As we have indicated Mr Barlow effectively abandoned his Quistclose argument as he could not demonstrate that there was a balance owing to Tin under the 7 September 2007 Letter Agreement. 147.The only issue remaining is whether the amounts set-off were validly and properly certified. 148.The issue of certification was argued at trial. The judge found that the announcements of 10 September and 28 October 2007 constituted the required certificates for the purpose of clause (e) of the Letter Agreement of 7 September 2007. The judge said at paragraph 192:
149.Underlying his conclusion that these documents were capable at law of being a certificate was his finding that the 7 September 2007 Letter Agreement “did not impose any specific requirement to be met before ‘the certificate could be issued’, other than that the certificate should be in writing and signed by an authorized officer.” (paragraph 190) Also underlying it was his understanding that the case law required no more of a document in order for it to be a certificate than that it be “a formal document attesting a fact.” He directed himself in accordance with the observations of the Privy Council in Fairfield Sentry Ltd v Migani[45] where Lord Sumption, in giving the judgment of the Board, said at paragraphs 25-27:
Then, after emphasizing that:
Lord Sumption said:
150.Mr Barlow informed us that this judgment of the Board only became available after the trial had concluded and so it was not the subject of comment in the parties’ final submissions. Nevertheless, he does not take issue with anything said by Lord Sumption. 151.The reason for the judge relying on the two announcements as constituting certificates is because in the first announcement the figure of HK$278,526,708 was said to be only a preliminary figure which was subject to confirmation. The announcement said:
152.The announcement of 28 October 2007 contained the following statement:
153.Both announcements were issued by order of the Board of the Manager and under the name of the Chairman of the Manager. 154.Mr Barlow submitted that neither announcement was capable of satisfying clause (e) of the 7 September 2007 Letter Agreement as they were not contractual certificates which contained an honest consideration and appraisal of the matter by the certifying agent and did not constitute a contractually-compliant record of the agent’s conclusion. Mr Barlow also argued that the documents were lacking in definitiveness so as to be able to be regarded as a certificate. 155.We do not accept Mr Barlow’s arguments. The documents which the judge found to be certificates have to be placed in context. Once the fraud was discovered action had to be taken to protect the unit holders. This required a full investigation to be carried out so that the Manager could report to the Trustee and the public. Such an investigation had to be thorough and credible, especially since the fraud had managed to go undetected throughout the due diligence process. Any report flowing from the investigation had to be capable of restoring the confidence of the public in the integrity of the REIT. An investigation possessed of all of these features of independence and thoroughness conducted with the assistance of both legal and accounting expertise would also protect the interests of the plaintiff and ensure fairness was done to him. 156.To achieve these goals the Board appointed an independent sub-committee to conduct the investigation. To assist the sub-committee a firm of solicitors, Clifford Chance, and a firm of accountants, Ernst and Young, were engaged. Both these firms as well as the independent sub‑committee presented reports to the Board. Their key finding in respect of the shortfall in rental income has been quoted earlier in this judgment. 157.In the Fairfield Sentry case Lord Sumption said that:
158.That commercial or legal context we have set out above. There can be nothing inappropriate in the context we have described of the Manager of a REIT communicating by means of a public announcement the discovery of a fraud and, subsequently, the results of the investigation of that fraud. Indeed, the Manager is simply performing the duties required of him under the REIT Code. One of the parties affected by the announcement is of course Tin. He is affected in a number of capacities, as a unit holder of the REIT, as employer of the persons who carried out the fraud and as the signatory to the 7 September 2007 Letter Agreement and drawer of the cheque for HK$278,526,708. There can be no doubt that the use of a public announcement was a perfectly legitimate vehicle to communicate to him the amount he owed to the REIT under the Letter Agreement. 159.All the other requirements set out by Lord Sumption cannot be disputed, except perhaps his final requirement that the document shows that it is intended to be definitive. In our view there can be no doubt that the announcement of 28 October 2007 was a definitive statement of the loss in rental income suffered by the REIT. Arguably, that may not be so in respect of the 10 September 2007 announcement if it is regarded as a stand-alone document. But, in the circumstances of this case, it should not be so regarded. The first public announcement is part of the context of the second public announcement and so we see no reason why they should not be read together. But in any event, even if the announcement of the preliminary assessment of the plaintiff’s liability is unable to meet the requirement of finality that Lord Sumption said was the sole object of certification, it is of no effect for the second announcement clearly meets that requirement. 160.The only other document relied on by the judge as a certificate for the purposes of clause (e) of the Letter Agreement was the Final Results Announcement up to the period 31 December 2007 signed by the Chairman of the Manager.[46] Applying the same analysis to this document we are satisfied that the judge was correct in concluding that this announcement was a certificate for the purposes of clause (e). 161.There is nothing in the legal context which would require more of a document to qualify as a certificate. We have already referred to the integrity of the process by which the amount payable by Tin was determined. With such a process in place to protect the interests of Tin there is no reason to read into clause (e) of the Letter Agreement any additional requirements, such as those suggested by Mr Barlow, not apparent from a plain reading of the clause. 162.We find no merit in this ground of appeal. G. The trial costs errors 163.This ground of appeal attacks the costs order that the judge made. The complaint is that notwithstanding that the judge entered judgment for Tin against the Manager and Trustee in the sum of HK$10,899,727, he ordered the plaintiff to pay to the Manager and Trustee:
164.The ground of appeal complains that the judge erred in law or acted in disregard of established principles in:
165.Mr Barlow submitted that because Tin was the successful party and had to come to court to obtain judgment in his favour he should be awarded his costs. He relied upon the legal principle that, usually, costs follow the event with the losing party paying the costs of the winning party as long as the winning party recovers more than nominal damages. He further argued that a successful party should not be deprived of his costs simply because he raised issues or made allegations on which he failed and any departure from the normal rule requires circumspection. 166.In support of this ground of appeal Mr Barlow relied upon the summary of the relevant legal principles by Bokhary PJ in Commissioner of Inland Revenue v HIT Finance Ltd (No 2)[47]:
Mr Barlow emphasized the importance of the words “due circumspection.” 167.Mr Barlow portrayed the judge as having departed from the normal rule that costs follow the event and of having done so without justification. However, that begs the question of what is the normal rule and what is meant by costs follow the event. This was also explained by Bokhary PJ in the HIT Finance case. He said it required a realistic view to be taken of the litigation and an assessment to be made as to who was the “real winner” of it. At paragraphs 5-6 of his judgment, he said:
168.In the present case the judge assessed Tin’s action as constituting 70% of the litigation and the set-offs as constituting 30% of the litigation. No dispute is taken by Mr Barlow with this assessment. 169.Tin lost on his action which was regarded by the judge as wholly unmeritorious. The Manager and Trustee also won on the set-offs so that the award of damages (HK$10,899,727), in the end represented a minuscule proportion of those originally claimed (HK$560,381,166). As Mr Fung SC told us (without any demur from Mr Barlow), the Trustee had always been willing to pay the HK$10,899,727 to Tin and offered (on a without prejudice save as to costs basis) to do so before the commencement of the litigation. Though sanctioned payment had not been made (and therefore the Trustee cannot derive protection under the Order 22 regime), the court could still take account of that offer as it does not fall within the scope of Order 62 Rule 5(1)(d), see Leung Lai Kwan v Lo Kai Wing [2015] 3 HKLRD 152, leave to appeal refused by the Court of Appeal in HCMP 1554 of 2015, 20 Aug 2015. We are in no doubt that the Manager and Trustee were the real winners of this litigation. The costs orders of the judge were properly made. H. The respondent’s notice of the Manager 170.The respondent’s notice raises two issues. The first is whether the judge was correct in entering judgment against the Manager on the basis that the Manager had been in breach of its obligations under the SPA in not tendering payment of the HK$10,899,727 which was due to Tin after the set‑offs. 171.The second issue concerns the set-off of HK$29,283,112 for legal fees, professional costs and investor relation costs. The judge found that these had been properly certified in accordance with the Letter Agreement and that, consequently, the set-off had been lawfully made. The certificate he relied upon was the Final Results Announcement up to the period 31 December 2007 signed by the Chairman of the Manager. However, the judge went on to say that if he was wrong in respect of the certification point he would not, because of insufficiency of evidence, be able to determine that these costs were properly incurred so as to be recoverable. By its respondent’s notice the Manager seeks a declaration, in the event Tin succeeds in this appeal on the certification point, that he is entitled to set off these costs on the basis of the evidence adduced at trial. 172.As we have found that the judge did not err on the certification point, this second issue in the respondent’s notice does not arise. 173.As to the first issue of whether judgment was correctly entered against it, the Manager contends that the judge erred in finding that it was in breach of the SPA. The respondent’s notice argues that none of the reasons relied on by the judge “can give rise to any ground of breach of the SPA by the Manager in connection with the non-payment of the aforesaid sum of HK$10,899,727.” 174.The argument of the Manager is a simple one. The award of damages is sourced from the retention sum payable under the SPA. It is a contractual sum arising from and payable in accordance with the provisions of the SPA. Although the Manager is a party to the SPA he has a separate legal capacity from the Trustee and separate legal obligations under the SPA. Under the SPA it is the Trustee who is the purchaser of the property being sold by the vendor, Tin, and it is the Trustee who is under the legal obligations to pay the vendor the consideration for the sale and to account to the vendor for the retention sum in accordance with paragraph 6.3.2 of the SPA. Under the SPA the Manager had no obligation to pay the consideration or to release the retention sum to Tin. 175.Even if, which is denied, the Trustee acted upon the advice or recommendation of the Manager in deciding not to release any part of the retention sum resulting in the Trustee being in breach of the SPA, Mr Wong for the Manager submits that was a matter between the Trustee and the Manager and did not make the Manager contractually liable to Tin. 176.All that the judge said on this issue was at paragraph 242:
177.It is noteworthy that the basis of the judge’s finding that the Manager is liable to Tin is that the Manager was in breach of his obligations under the SPA. Yet the judge does not, in this paragraph, identify the particular obligations that the Manager had breached. However, his reference to paragraph 186(1)(b) of his judgment leads the reader to seek the answer there. In that paragraph of his judgment the judge sets out the respective cases of the parties. We take the judge’s reference to this paragraph as an implicit acceptance by him of the case advanced by Tin. As set out in paragraph 186(1)(b) (i) – (vi) this was:
178.Although, as Mr Barlow points out, this issue is now academic as the Trustee has paid the judgment sum, the Manager is entitled to have this issue resolved. 179.In support of his contention that the Manager owed a contractual obligation to Tin, Mr Barlow referred the court to how he put the matter in his closing address. There he had argued that both the Manager and the Trustee were responsible “for the performance of the RREEF REIT’s contractual commitments, including the delivery over of the monetary consideration due to the Plaintiff under the SPA and the Letter Agreement.” Underlying this argument is the relationship between the Manager and the Trustee as governed by the Trust Deed which, it was said, “governed the responsibilities of D2 and D3 and the manner in which they entered into the SPA as co-parties thereto with co-ordinate responsibility for the performance of the RREEF REIT’s contractual commitments under the SPA. Accordingly, liability for damages for the non-performance of the RREEF REIT’s contractual commitments to make its payment obligation falls equally upon D3 and D2.” Mr Barlow did not refer the court to any principle of the law of contract or any case authority in support of his argument. 180.There is no doubt that the Trust Deed regulated the relationship between the Manager and the Trustee. But Tin was not a party to the Trust Deed and none of the provisions of the Trust Deed were incorporated into the SPA. The Manager and the Trustee are separate legal entities with the Trustee having the capacity to enter into contractual relations and the SPA is an occasion when the Trustee exercised that capacity, in its own right. In exercising its contractual rights the Trustee may, like any legal entity, receive, and act upon, the advice of any other person. That, however, does not result in the third party tendering the advice becoming contractually bound to the person with whom the Trustee is entering into contractual relations. 181.On basic principles of contract law we cannot see how the Manager can be made contractually liable to Tin for the Trustee’s breach of its contractual obligations under the SPA. 182.We, therefore, find for the Manager on its respondent’s notice and set aside that part of the judgment awarding Tin, as against the Manager, the judgment sum. I. Disposition 183.For the above reasons, we dismiss Tin’s appeal and allow the Manager’s cross-appeal. We make an order nisi Tin is to pay the costs of the Manager and the Trustee in the appeal and the costs of the Manager of the cross-appeal, and such costs are to be taxed (in the case of the Manager, with certificate for 2 counsel) if not agreed.
Mr Barrie Barlow SC and Mr Chan Pat Lun, instructed by Hill Dickinson Hong Kong, for the Plaintiff (Appellant) Mr Wong Yan Lung SC and Mr Mike Lui, instructed by Davis Polk & Wardwell, for the 2nd Defendant (1st Respondent) Mr Eugene Fung SC, instructed by Linklaters, for the 3rd Defendant (2nd Respondent) [1] Appeal Bundle K p.2643 to 2644 [2] Appeal Bundle K p.2647 to 2649 [3] Appeal Bundle K p 2711 [4] Appeal Bundle I p 2194 [5] Appeal Bundle I p 2215-6 [6] C3B/277, cl 6.3.2. [7] C3B/277, cl 6.3.1. [8] See D1/D2 Defence §41(a) [A/55]. [9] See also his written closing submissions at para 3.2(c) where Mr Barlow identified one of the core elements of Tin’s case as follows: “he was not responsible for the Dual Documentation Scheme, once it was brought to his attention on 20 August 2007, he took responsibility …”, at Appeal Bundle F p 1454. See also footnote 22 at F p 1445 [10] Referring in particular to the transcripts at Appeal Bundle C p 832-25 to 832-34. [11] Appeal Bundle F p 1456 [12] (2013) 16 HKCFAR 663 at 672-673 (paragraphs 21-23) [13] For the details of the letters, public announcements and annual reports, see §182 of the Judgment. [14] Judgment, §197 [15] Judgment, §183 [16] Judgment, §179 [17] Made up of $156,000,000, $64,955,000 and $50,000,000, the sums referred to in Judgment, §184(2) to (4) [18] Being the difference between the sums retained by the Trustee ($566,023,166) and the liabilities of Tin to the Trust that had been set off ($276,597,000), see Statement of Claim §81 [19] Being the detention of Tin’s dividends from the Trust, see Judgment, §184(5) and Statement of Claim §82 [20] Statement of Claim, §§81, 82 [21] Statement of Claim, §78 [22] Statement of Claim, §76 [23] Statement of Claim, §77 [24] Statement of Claim, §77, referring to §60, see also §§61 and 62 [25] Plaintiff’s opening submission, §71 [26] Judgment, §181 [27] Defence of 1st and 2nd defendants, §§80 and 81, and Appendix 1; Defence of 3rd defendant, §§38 to 44 and 63 [28] This provides an exception to the general rule that an affidavit sworn for the purpose of being used in interlocutory proceedings may contain statements of information or belief with the sources and grounds thereof. [29] Transcript, Day 9, p 60 line 23 to p 61 line 23 [30] Judgment, §209 [31] Judgment, §241 [32] Judgment, §201 [33] Judgment, §202 [34] Transcript, Day 10, p 51 line 20 to p 52 line 20 [35] Judgment, §§218 to 220 [36] Judgment, §222 [37] Judgment, §§230, 231 [38] Judgment, §205 [39] Judgment, §206 [40] Judgment, §207 [41] Judgment, §208 [42] Judgment, §235 [43] Judgment, §§235, 236 [44] Judgment, §§238 to 240 [45] [2014] 1 CLC 611 [46] This document was used for the set-off for legal fees, professional costs and investor relation costs and also for the set-off for the loss of the Manager’s fees resulting from the discrepancies in the rental payments. [47] [2014] 4 HKLRD 412 |
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