Leong Chi Kai v. Chan Wing Sun

HCA 238/2016

[2021] HKCFI 1431

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 238 OF 2016

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Before: Hon Linda Chan J in Court

Dates of Hearing: 10-11, 14 May 2021

Date of Judgment: 20 May 2021

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J U D G M E N T

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1.In this action the plaintiff, Mr Leong Chi Kai (“P”), claims against the defendant, Mr Chan Wing Sun (“D”), for breach of a Settlement Agreement dated 24 December 2012 (“SA”) and a Memorandum dated 18 June 2013 (“Memorandum”) entered into between them for the purpose of settling all their disputes in HCA 1342/2010 and HCA 99/2012 (together “Disputes”).

2.Under the SA and the Memorandum, the parties agreed to settle the Disputes by appointing Mr Patrick Ting, a certified public accountant (“Auditor”), to audit the books and accounts of Tong Ka Development Limited (“Company”) and, thereafter, to repay to the Company the amounts found due from them (and their respective companies).  The Auditor in his letter dated 15 May 2013 (“1^st Report”) and another letter dated 23 September 2013 (“2^nd Report”) found that as at 31 March 2012, P owed an aggregate amount of HK$2,053,935.53 (“Amount”) to the Company, and the Company owed HK$1,455,752.12 to D. 

3.P was dissatisfied with the 1^st and 2^nd Reports and did not pay the Amount to the Company.  It is P’s case that D acted in breach of certain oral, alternatively, implied terms to the SA and the Memorandum by failing to disclose all the documents relating to D’s companies to the Auditor.  This, it is said, led to the Auditor coming to the wrong findings that P owed the Amount to the Company, when in fact it was D who owed HK$3,271,944.02 to the Company. 

4.D denies that the SA and the Memorandum were subject to the alleged oral or implied terms or that he acted in breach of them. He contends that the SA, the Memorandum and the Auditor’s findings in the 2^nd Report are binding upon the parties. 

Background

5.In 1995, P and D began to cooperate in carrying on business through the Company.  They became the only directors and shareholders of the Company with equal shareholding.  The Company has always been managed by P and D jointly, with D being responsible for marketing and general management while P was responsible for supervising the work at sites.  The Company employed about 10 staff when it was in active business.  Both P and D had access to the Company’s books and records and the staff. 

6.Since 2006, the Auditor has been the auditor of the Company. 

7.Until early 2009, the Company actively engaged in building and construction works in Hong Kong and Macau primarily as sub-contractors for other main contractors. 

8.Apart from the Company, P and D also carried on construction projects through other companies owned and controlled by them in that:

(1)  P was a shareholder and had effective control of (a) 啟隆工程有限公司 (澳門) (“KL Macau”), (b) Tong Ka Building Materials (Macau) Co Ltd, a Macanese company (“TKM”), and (c) Kai Leong Engineering and Trading Limited[1] (“KLE”) (collectively “P’s Companies”);

(2)  D was the sole shareholder and had control over Tong Ka Engineering Limited.  D was one of the 2 shareholders and directors of New Base Engineering Co Ltd (正朗工程有限公司), a Macanese company (together “D’s Companies”). 

9.In 2009, the relationship between P and D turned sour whereupon they agreed to go separate way and would not continue their cooperation through the Company.  For the purpose of bringing an end to their cooperation, the parties agreed that P could check the books and accounts of the Company to see if either party might be liable to pay any sums to the Company.  Since then, P had begun to check the books and accounts of the Company and raised questions with D during the process until early 2010 when D allegedly became uncooperative in answering P’s enquiries and denied him of access to the documents.   

10.In 2010, P commenced HCA 1342/2010 against D (and others) for alleged misappropriation of Company’s assets and breach of fiduciary duties owed to the Company.  In 2012, D commenced HCA 99/2012 against P based on similar allegations. 

11.On 30 November 2012, P (accompanied by his solicitor, Mr Ong) and D participated in a mediation conducted by an independent mediator (“Mediator”).  They settled the Disputes by entering into the SA. 

12.The SA provides as follows:

“Regarding the Dispute particularized in the corresponding Mediation Agreement dated 30^th November 2012 between the Parties.

As a result of a mediation on the 30^th November 2012 (“the Mediation”), the Parties have come to agreement on the following terms :-

1. The Parties agree to jointly appoint Mr. Patrick Ting, CPA (“the Auditor”), to audit the books and accounts of Tong Ka Development Limited (“the Company”) for the period from 1^st April 2004 to 31^st March 2011;

2. The Parties agree to fully co-operate by disclosing all relevant documents, including but not limited to contracts, bank statements, accounts, etc. as requested by the Auditor;

3. The Parties are at liberty to seek clarification from the Auditor at their own costs within 7 days upon receipt of the draft report from the Auditor;

4. The Parties agree to be bound by the final report prepared by the Auditor;

5. The auditing of the books and accounts of the Company will take place in the registered office of the Company. The Parties are entitled to be present in the course of auditing. [P] undertakes not to take away any documents in possession of the registered office of the Company;

6. In the course of auditing, if the Auditor is of the opinion that other accounts of [P] or [D] or of their related companies may also be involved, the Parties undertake to make further discovery or render further information in relation to those accounts as requested by the Auditor;

7. Upon completion of the final report prepared by the Auditor, the Parties agree to repay to the Company all amounts as may be found due from them or their respective related companies and thereafter to do the necessary procedures for transfer of the shares of the Company at the consideration of HK$1.00 to the other party within 14 days after deducting all liabilities and paying all dividends;

8. Upon compliance with all of the above, the Parties agree to discontinue their respective actions against each other with no order as to costs and waive all claims against each other arising from the Dispute save and except matters arising out from the final report prepared by the Auditor;

9. The Parties agree to share the mediation fees equally and bear their own legal and other costs and expenses of preparing for and attending the Mediation;

10. The Parties agree that the contents of the Mediation shall remain strictly confidential and shall not be disclosed to any third party;

11. The Parties agree that the contents of this Settlement Agreement shall remain confidential save for the purpose of enforcement or where they are required by law to disclose;

12. The Parties further agree that in case of dispute over the enforcement of this Settlement Agreement, the Parties will firstly attempt to resolve such dispute by mediation before resorting to legal proceedings;

13. The Parties will not commence any further proceedings (legal or otherwise) in respect of the Dispute.

N.B. The Parties are principally responsible for ensuring that the terms of this Settlement Agreement correspond with their wishes.  The Mediator may assist the Parties in drafting and writing out the Agreement, but will not be responsible for the contents hereof.”

13.Pursuant to the SA, P proposed to appoint the Auditor to carry out the audit of the books and accounts of the Company for the period from 1 April 2004 to 31 March 2011 (“Period”), and D agreed.

14.From January to April 2013, the Auditor carried out the audit and made enquiries on the business both at the Company’s office and at his own office.  During the process, both P and D had provided their inputs to the Auditor in that:

(1)  P attended the audit at the Company’s office on 29 January 2013 and 4 February 2013 and the Auditor’s office on 27 February 2013 and 12 March 2013.  He presented some documents to the Auditor for his consideration including documents relating to P’s Companies and the impugned transactions complained of in the Disputes.  P raised questions about the financial position of the Company and had discussions with the Auditor from time to time.

(2)  P also sought information and documents from Ms Lee, a staff of the Company. 

(3)  D provided supporting documents relating to the money transferred to P or P’s Companies.  He also provided explanations and supporting documents in response to some of the questions raised by P with the Auditor.  Adjustments were made by the Auditor to reverse some of the expenses incurred by the Company for the personal purposes of D. 

15.In his 1^st Report, the Auditor stated that according to the accounting records of the Company, the “Accounts and Other Receivables” (“Receivables”) and the “Amount due to a Director” and “Accumulated Losses” as at 31 March 2011 and 2012 are as follows:

	As at 31/3/2012	As at 31/3/2011
Receivables
- KL Macau	809,001.46	809,001.46
- TKM	641,054.09	641,054.09
- KLE	600,000.00	600,000.00
- Others	3,879.98	62,982.09
Total Receivables	2,053,935.53	2,113,037.64
Amount due to D	1,455,752.12	1,455,752.12
Accumulated losses	855,437.17	820,220.70

16.P was dissatisfied with the 1^st Report and sought to change the findings of the Auditor.  For this purpose, P provided about 10 bundles of documents to the Auditor for his consideration which, he believed, would show that he did not owe any money to the Company and, instead, D should be required to repay “huge sums” to the Company[2].  It appears that the Auditor did not change his findings. 

17.Thereafter, the parties agreed to attend a further mediation which took place on 18 June 2013.  The mediation was attended by the Auditor, P and D (and representatives of their respective solicitors) and the Memorandum was signed on the same day. 

18.The Memorandum provides as follows:

“Regarding the Dispute particularized in the corresponding Mediation Agreement dated 30^th November 2012 and 18^th June 2013 respectively between the Parties.

As a result of a mediation on the 18^th June 2013 (“the Mediation”), the Parties have come to agreement on the following terms :-

1. [D] shall provide all general ledgers of Tong Ka Development Limited (“the Company”) for the period from 1^st April 2004 to 31^st March 2011 (“the Ledgers”) to [P] through Mr. Patrick Ting, CPA (“the Auditor”);

2. The Auditor shall notify [P] to collect the Ledgers once he receives the complete set of the Ledger from [D] and the Auditor confirms that the contents are correct;

3. [P] shall collect the Ledger within 24 hours once he receives the notification form the Auditor as aforesaid;

4. [P] is at liberty to seek clarification from the Auditor in respect of any items in the Ledger within 14 working days from the date of his receipt of the Ledger;

5. No further extension of time should be allowed unless consent is obtained from all parties;

6. [P] should comply with paragraph 6 of [the SA].

Dated 18^th June 2013

N.B. The parties are principally responsible for ensuring that the terms of this Memorandum correspond with their wishes.  The Mediator may assist the parties in drafting and writing out the Memorandum, but will not be responsible for the contents hereof.”

19.Pursuant to the Memorandum, on 21 June 2013, the Auditor obtained from the Company a full set of copies of the Company’s general ledgers (“Ledgers”).  On 25 June 2013, P obtained from the Auditor copies of the Ledgers.  Since then, the Auditor has not requested D to provide any further documents.   

20.Meanwhile, P continued to raise questions with the Auditor concerning the 1^st Report.  In his letter dated 22 August 2013, the Auditor informed the parties that he had been preparing the answers and supporting documents for P and expected the process would be completed in around the end of August 2013. 

21.By letter dated 3 September 2013, D through his former solicitors stated that the Auditor had already clarified all the questions raised by P in respect of the Ledgers and demanded P to pay the Amount within 7 days thereof.

22.In his letter dated 4 September 2013 to D, the Auditor stated that P had attended his office on 31 August 2013 and obtained the answers and supporting documents on the questions raised by P about the Ledgers and provided a set of the Ledgers to P.

23.In response, in its letter dated 5 September 2013, Ong & Chung (“OC”), solicitors for P, stated that it was “premature” for D to ask for compliance with the SA as the Auditor had not confirmed the contents of the Ledgers to be “correct” and, therefore, P’s requisitions were “interlocutory requisitions spotted by him upon production of those piece meal ledgers by [D]”.  This was followed by another letter of 12 September 2013 whereby OC requested D “to produce all general ledgers in compliance with clause 1 of the Memorandum for the auditor to confirm that they are complete and correct under clause 2”.

24.In view of P’s stance, the Auditor issued a letter dated 13 September 2013 addressed to D (“1^st Confirmation”) in the following terms:

“We confirm the ledger received from you for the [Company] for the [Period] is complete and is in line with the figures stated in the audited financial statements from 1 April 2004 to 31 March 2011.

[P] has come to our office to pick up a copy of the above mentioned ledger on 25 June 2013. He has raised nine questions to [sic] us on 6 July 2013 and further three questions on 15 July 2013.

[P] has come to our office around 11am on 31 August 2013. During the meeting, we have passed him the answers and supporting documents for [sic] the questions raised by him”.

25.P was not satisfied with the 1^st Confirmation and insisted that the Auditor had to confirm that the Ledgers were “correct” as required by the Memorandum.  This led to the Auditor issuing another letter to P and D dated 17 September 2013 (“2^nd Confirmation”) in the following terms:

“We confirm the ledger received from your company on 21 June 2013 for the [Period] was a complete set and the closing figures stated in the ledger are in line with the figures stated in the profit and loss account and balance sheet of the audited financial statements from 1 April 2004 to 31 March 2011.

It is not our industrial norm to use the wording ‘correct’ to describe the ledger. Our opinions about your company’s financial statements have been stated in each year’s auditors’ report. The auditors’ reports have been included in the audited financial statements.

The complete set of your company’s ledgers for the [Period] has been passed to [P] on 25 June 2013.

He has raised nine questions to [sic] us on 6 July 2013 and further three questions on 15 July 2013.

[P] has come to our office around 11am on 31 August 2013. During the meeting, we have passed him the answers and supporting documents for [sic] the questions raised by him”.

26.Despite the 2^nd Confirmation, in OC’s letter dated 19 September 2013, P stated that the Auditor had not objected to the use of the word “correct” in the Memorandum, and P would only accept the Ledgers “upon the same being certified ‘correct’ by [the Auditor]” and required the Auditor to “conduct a thorough examination and/or verification to confirm the correctness of the said ledgers without delay”.   

27.In his letter dated 21 September 2013 to OC, the Auditor stated that he had not been involved in drafting the Memorandum and he would definitely object to the use of the word “correct” had he known that such word would be used.  He further explained in these terms:

“Please be noted [sic] our assurance engagement is regulated by the Hong Kong Auditing Standards and is monitored by the Hong Kong Institute of Certified Public Accountants. The wording ‘correct’ is too vague if no further specification is provided (e.g. scope and materiality). It is impractical for us to conduct the so-called ‘examination’ or ‘verification’ at this stage.”

28.On 23 September 2013, the Auditor issued his report (“2^nd Report”) with the same findings as those stated in the 1^st Report. 

29.With a view to resolve the impasse between P and the Auditor over the use of the word “correct”, D through his former solicitors’ letter of 24 September 2013 proposed to hold a third mediation with the costs to be borne by the parties equally.  However, P rejected the proposal and, instead, proposed to appoint “replacement auditors” to certify the “correctness” of the Ledgers with the assistance of the Company’s accountant.

30.By letter dated 7 October 2013, the Auditor stated that he would conduct an examination of the Ledgers and certify their correctness but P and D had to agree on the scope and materiality of the examination, and suggested a further mediation meeting to discuss the issues. 

31.In their letters dated 8 October 2013 to OC, D’s former solicitors referred to the 2^nd Report and demanded P to pay the Amount to the Company within the next 7 days failing which D would take proceedings against P; and reiterated D’s proposal to hold a third mediation.

32.After further exchanges in correspondence, on 20 November 2013, P and D agreed to set the examination level at HK$5,000 per item but exclude any sundry expenses. 

33.By letter dated 9 December 2013, the Auditor set out the terms of the engagement in accordance with Hong Kong Standard on Related Services 4400 “Engagement to Perform Agreed-Upon Procedures Regarding Financial Information” issued by HKICPA, which involved an examination of the correctness of the Ledgers for the Period and covered (1) all items of income and expense of HK$5,000 or above and check whether they are in agreement with the respective contracts/invoices/receipts; (2) check whether all bank account items are in agreement with the movements shown in the bank statements; (3) check whether the beginning balances of all items match with the closing balances of the previous year; and (4) summarise and report all items with discrepancies found, and items without discrepancies would be regarded as correct entries in the Ledgers (“Examination”). The fees would be HK$70,000 plus out-of-pocket expenses.   

34.The matter then took a turn when D through his former solicitors’ letter of 7 January 2014 reiterated that he was agreeable to the 2^nd Report but P had deployed tactic to delay payment of the Amount to the Company. 

35.After further debate in correspondence, in their letter dated 11 March 2014, D through his former solicitors stated that he had no objection to the Auditor carrying out the Examination if P would bear the fees thereof as it was P who sought clarification on the correctness of the 2^nd Report.  If P did not agree to the Examination, it would be necessary to hold a third mediation. 

36.No agreement was reached on either the Examination or the third mediation. 

37.On 26 January 2016, P commenced this action against D seeking, inter alia, specific performance of the SA and the Memorandum and damages against D for breach of the same.  

Issues

38.P’s case, as pleaded in his Re-Re-Amended Statement of Claim dated 27 June 2019 (“SOC”), may be summarised as follows.

39.There were the following oral terms and/or implied terms to the SA[3] (collectively “§8 Terms”):

(1)  The parties “shall within reasonable time frankly, faithfully, honestly and fully disclose all relevant documents of the Company and of their related companies to the Auditor for the purpose of ascertaining their true indebtedness, if any, owed by or to the Company as found by the Auditor” (“§8(a) Term”);

(2)  The parties “shall be bound by the final report prepared by the Auditor subject to the conditions that: (i) the Auditor shall have all proper and correct documents and information provided by them; and (ii) their requisitions, if any, are fully answered properly and satisfactorily to both parties” (“§8(b) Term”);

(3)  The parties “shall be entitled to inspect all documents and information that have been supplied to and considered by the Auditor for the purpose of the final report” (“§8(c) Term”); and

(4)  P “should be allowed to witness and be present in, and be notified and informed of, the process of the auditing of the Company’s documents, books and accounts” (“§8(d) Term”).

40.Similarly, the Memorandum was subject to the following oral terms and/or implied terms[4] (collectively “§13 Terms”):

(1)  D “shall within reasonable time frankly, faithfully, honestly and fully provide all relevant books, accounts, documents and information of the Company (including his related companies having any business dealing with the Company) to [P] via the Auditor” (“§13(a) Term”);

(2)  D “shall provide assistance to the Auditor to verify the correctness of the documents and information supplied by [D], and also whenever [P] would have any questions on the documents supplied by [P]” (“§13(b) Term”);

(3)  The parties “shall be bound by the final report prepared by the Auditor subject to the conditions that: (i) the Auditor shall have all proper and correct documents and information provided by [D] as stated in the [SA] and the Memorandum; and (ii) [P’s] questions and requisitions, if any, are fully answered properly and satisfactorily with the assistance of [D]; (iii) the Auditor could verify the correctness of the supplied document and information supplied by [D]” (“§13(c) Term”);

(4)  The parties “shall be entitled to inspect all information that have been supplied to and considered by the Auditor for the purpose of the final report” (“§13(d) Term”); and

(5)  The parties “shall try their best endeavours in good faith to further agree upon the detailed procedures and steps to implement and carry out the [SA]” (“§13(e) Term”).

41.D acted in breach of the SA, as varied by the Memorandum (“SA/Memo”)[5], in that he failed to:

(1)  “provide all relevant documents of the Company and of his related companies to [P] via the Auditor subsequently”[6];

(2)  “provide full and proper documents of the Company and his related companies to the Auditor”[7];

(3)  “provide assistance and further information to the Auditor to deal with the said 9 questions or requisitions raised by [P][8];

(4)  “provide proper and/or sufficient assistance to the Auditor to verify the correctness of the documents and information supplied by [D]”[9]; and

(5)  “try his best endeavour in good faith to agree upon how the correctness of the documents, books and accounts supplied by [D]”[10].

42.The 2^nd Report is not binding upon P given that:

(1)  It was prepared by the Auditor “upon a factually wrong and/or inaccurate and/or incomplete basis”, and P “never admitted, accepted or agreed” to the same[11]. Under “Particulars”, P sets out the bases for contending that he did not owe the Amount to the Company[12] and, instead, P should have a credit balance of HK$711,668.57[13].

(2)  It was “arrived at by the Auditor’s having departed from [P’s] instructions in a material aspect[14]”. Under “Particulars”, there is a lengthy plea on “Kam Tin Project”, “Ho Man Tin Project” and “La Cite Project (Macau)” which, it is said, show that D (and D’s Companies) owed HK$8,137,712.02 to the Company (“Alleged Payables”)[15].  Had the 2^nd Report properly recorded the Alleged Payables, D would have been liable to pay HK$6,056,453.02 (“Alleged Debt”) to the Company[16].

(3)  Had the Auditor followed P’s instructions and properly audited the books and accounts of the Company, the 2^nd Report would have recorded an accumulated profits of HK$4,520,550.90 for the Company, and D would have to repay the Alleged Debt to the Company[17].

(4)  P would be entitled to receive HK$3,271,944.02, being (i), being 50% of the accumulated profits (HK$2,260,275.45) and, being 50% of the share capital (HK$300,000)[18].

43.Further, D acted in breach of the SA/Memo by refusing to pay any additional fees to the Auditor in respect of the Examination[19]. Consequently:

(1)  the Auditor has not carried out the Examination and will not prepare any final report, and the SA “become incapable of performance”[20];

(2)  D’s breach “amounts to a wrongful repudiation” of the SA/Memo, which was accepted by P when he issued the writ[21].

(3)  Alternatively, the SA/Memo “has been frustrated by the refusal of the Auditor to confirm the correctness of the [Ledgers] without additional payment which payment [D] refused to pay or contribute”[22]. The parties should be at liberty to restore the 2 actions[23].

44.P claims the following relief against D:

(1)  A declaration that the SA/Memo was terminated or, alternatively, frustrated;

(2)  Alternatively, an order that D do disclose and provide all documents, books and accounts of the Company and his related companies to P forthwith pursuant to the SA;

(3)  Alternatively, an order for accounts and inquiries;

(4)  Alternatively, a declaration that D is liable to and do pay the Alleged Debt or such lesser amount to the Company;

(5)  Alternatively, an order that D do provide all reasonable assistance to the Auditor in due and proper compliance with the SA including, inter alia, assisting the Auditor to answer questions and requisitions on documents and information supplied by D; and

(6)  Alternatively, an order that D do pay such outstanding and overdue sum forthwith to the Company, as found by the Auditor subject to §(2), (3) and (5) above being fully complied with. 

45.When questioned by this Court on the validity of the various pleas and relief in the SOC, Mr Paul Wong, counsel for P, confirms that:

(1)  P abandons the §8(d) Term, which concerns P’s alleged right to be present in the audit process;

(2)  P abandons the pleas in §§22D and 23C of SOC, which relate to P’s alleged entitlement to receive 50% of the Company’s accumulated profits and share capital;

(3)  P does not seek the relief under prayer (2) and (5) as he already knew what amounts were owed and payable by D to the Company; and

(4)  P only pursues the relief sought in prayer (3), (4) and (6).

46.As stated above, D denies that he acted in breach of the SA/Memo or that the parties are not bound by the findings in the 2^nd Report. 

47.The following facts and matters relied on by D are not in dispute:

(1)  D provided all the books and accounts of the Company as requested by the Auditor[24];

(2)  D provided the Ledgers to the Auditor who, in turn, provided them to P;

(3)  the Auditor never requested D to provide any documents of D’s Companies or any further documents and information, other than those already provided by D[25]; and

(4)  all the questions raised by P had already been considered by the Auditor, and his answers together with supporting documents were provided to P prior to issuing the 2^nd Report[26]. 

48.Accordingly, the issues which require determination of the Court are:

(1)  whether the SA and the Memorandum were subject to the alleged oral terms or implied terms;

(2)  if so, whether D acted in breach of the SA/Memo; and

(3)  if D acted in breach of the SA/Memo, whether P is entitled to the relief sought in prayer §(3), (4) and (6). 

49.I consider these issues in turn.

Alleged Oral Terms

50.In my judgment, P’s case on the §8 Terms and §13 Terms, insofar as they are alleged to have been agreed orally during the 2 mediations (“Alleged Oral Terms”), are demurrable and should be struck out in limine. 

51.As this Court points out during Mr Wong’s oral opening, the communications during the 1^st and 2^nd mediations are privileged and confidential.  It is not open to P to adduce in evidence any communications between the parties (including the Mediator) during the 2 mediations without the consent of all parties and leave of the Court. 

52.This can be seen from the following provisions of the Mediation Ordinance (Cap 620) (“MO”):

(1)  “Mediation communication” is defined as “means (a) anything said or done; (b) any document prepared; or (c) any information provided, for the purpose of or in the course of mediation, but does not include an agreement to mediate or a mediated settlement agreement” (s 2 of MO);

(2)  The objects of the MO are “(a) to promote, encourage and facilitate the resolution of disputes by mediation; and (b) to protect the confidential nature of mediation communications” (s 3 of MO); and

(3)  The MO applies to any mediation conducted under an agreement to mediate if, inter alia, “the mediation is wholly or partly conducted in Hong Kong” (s 5(1) of MO).

53.The confidentiality of mediation communications is protected by s 8 of the MO, while the admissibility of mediation communications in evidence is governed by s 9 of the MO, which are in these terms:

“8. Confidentiality of mediation communications

(1) A person must not disclose a mediation communication except as provided by subsection (2) or (3).

(2) A person may disclose a mediation communication if—

(a) the disclosure is made with the consent of—

(i) each of the parties to the mediation;

(ii) the mediator for the mediation or, if there is more than one, each of them; and

(iii) if the mediation communication is made by a person other than a party to the mediation or a mediator—the person who made the communication;

(b) … (g)

(3) A person may disclose a mediation communication with leave of the court or tribunal under section 10—

(a) for the purpose of enforcing or challenging a mediated settlement agreement;

(b) for the purpose of establishing or disputing an allegation or complaint of professional misconduct made against a mediator or any other person who participated in the mediation in a professional capacity; or

(c) for any other purpose that the court or tribunal considers justifiable in the circumstances of the case.

(4) …

9. Admissibility of mediation communications in evidence

A mediation communication may be admitted in evidence in any proceedings (including judicial, arbitral, administrative or disciplinary proceedings) only with leave of the court or tribunal under section 10.”

54.Mr Ray Kwan, counsel for D, cites Champion Concord Limited v Lau Koon Foo (2011) 14 HKCFAR 534 where Ribeiro PJ (at §17) reminded the parties the importance of maintaining the confidentiality in mediation in this way:

“Before leaving this matter, we wish to make it clear that we must not be taken to be accepting the appropriateness of the disclosures made by Mr Yeadon and Mr Kee regarding the mediation process. The fundamental importance of the confidentiality in mediation is universally acknowledged and it can only be in highly exceptional circumstances that evidence which invades such confidentiality will be permitted to be adduced. There was no argument as to whether the circumstances put forward by the appellants bring them within such an exception, and we wish expressly to keep that question open.”

55.P has never sought the consent of D or the Mediator to disclose anything said or done during the 2 mediations.  Nor has P made any application under s 10 of the MO for leave to disclose or admit in evidence any such mediation communications.  Instead, P (and his legal advisers) completely ignored the confidential nature of the mediation communications and saw fit to allege, in the SOC and P’s witness statement, that the parties had during the 2 mediations agreed on the Alleged Oral Terms.  In so doing, P (and his legal advisers) unilaterally and wrongfully undermined, if not destroyed, the confidentiality of the 2 mediations. 

56.For the above reasons, I consider that P’s conduct in raising and pursuing the Alleged Oral Terms constitute an abuse of process.  In any event, there is no basis to admit in evidence those parts of P’s WS which relate to the Alleged Oral Terms.

Alleged Implied Terms

57.P’s case on the §8 Terms and §13 Terms, insofar as it is alleged to be implied to the SA and the Memorandum (“Alleged Implied Terms”), is equally demurrable.

58.Since the CJR, it has been made clear to the legal advisers  that it is not permissible for a party to make, let alone verify on oath, inconsistent allegations of fact (see Hong Kong Civil Procedure 2021, §§18/7/12 & 18/12A/1).  I am unable to see how P can properly allege and verify on oath that the parties discussed and agreed on the §8 Terms and §13 Terms during the 2 mediations and, at the same time, the parties did not agree on those very same Terms, such that they should be implied into the SA and the Memorandum.  It is particularly abusive when the fact relevant to the allegations are plainly within P’s knowledge, so that there could be no justification for him to put forward inconsistent factual alternatives and verify the truthfulness of both alternatives. 

59.Nevertheless, I will deal with each of the Alleged Implied Terms in case this matter goes further.

60.The requirements for implying a term in a written contract were stated by Lord Simons in BP Refinery (Westernport) Pty Ltd v President, Councillors and Ratepayers of Shire of Hastings (1978) 52 ALJR 20 at 26 (as applied in Kensland Realty Ltd v Whale View Investment Ltd (2001) 4 HKCFAR 381 at§59) in this way:

“… for a term to be implied, the following conditions (which may overlap) must be satisfied: (1) it must be reasonable and equitable; (2) it must be necessary to give business efficacy to the contract, so that no term will be implied if the contract is effective without it; (3) it must be so obvious that ‘it goes without saying’; (4) it must be capable of clear expression; (5) it must not contradict any express term of the contract.”

61.Amongst the §8 Terms, only §8(a) Term and §8(b) Term fall to be considered, given that:

(1)  §8(d) Term has been abandoned;  

(2)  there is no allegation that D acted in breach of §8(c) Term; and

(3)  in any event, it is indisputable that P was provided with all the documents and information which had been supplied to and considered by the Auditor for the purpose of the 2^nd Report.   

62.So far as §8(a) Term is concerned:

(1)  it purports to require the parties to provide all documents of the Company and their related companies to the Auditor.  This is contradictory with clause 2 of the SA, which requires the parties to disclose all relevant documents as requested by the Auditor;

(2)  it is unreasonable and inequitable to require the parties to disclose all relevant documents of the Company and their related companies for the purpose of ascertaining their indebtedness, bearing in mind that the Company has carried on business for 14 years and the accounts of the Company have been audited by the Auditor in the past;

(3)  it is not necessary to give business efficacy to the SA, and the SA is effective without such term, as the parties were required to disclose the documents as requested by the Auditor; and

(4)  it is neither obvious nor capable of clear expression. 

63.As for §8(b) Term:

(1)  it contradicts with clause 4 of the SA, which provides that the parties agree to be bound by the final report prepared by the Auditor without the alleged conditions;

(2)  it is not necessary to give business efficacy to the SA, and the SA is effective without such term, as the parties already agreed to be bound by the Auditor’s final report which is the 2^nd Report; and

(3)  it is neither obvious nor capable of clear expression. 

64.Amongst the §13 Terms, §13(d) Term does not need to be considered. It is common ground that P was provided with all the documents and information which had been supplied to and considered by the Auditor. As such, there is no basis for P to allege that D acted in breach of §13(d) Term.  

65.§13(a) Term is materially the same as §8(a) Term.  For the same reasons stated in §62 above, it cannot be implied into the Memorandum.

66.As for §13(b) Term:

(1)  it contradicts with clause 2 of the Memorandum, which  only requires the Auditor to collect the Ledgers from D and to confirm the contents of the Ledgers without any obligation on the part of D to assist the Auditor;

(2)  it is neither reasonable nor equitable to require D to assist the Auditor to verify the documents and information provided by D in the absence of any request made by the Auditor.  Nor is it reasonable or equitable to impose the alleged duty only on D but not P;

(3)  it is not necessary to give business efficacy to the Memorandum, and the Memorandum is effective without such term, given that the parties have the right to seek clarification from the Auditor, and were required to disclose the documents as requested by the Auditor; and

(4)  it is neither obvious nor capable of clear expression.

67.In relation to §13(c) Term is materially the same as §8(b) Term.  For the same reasons stated in §63 above, it cannot be implied into the Memorandum.

68.As for §13(e) Term:

(1)  it contradicts with clause 4 of the Memorandum, which gives a right to P to seek clarification from the Auditor in respect of any items in the Ledgers within 14 working days without imposing any obligations on the parties to agree upon any procedures or steps to carry out the SA;

(2)  it is not necessary to give business efficacy to the Memorandum, and the Memorandum is effective without such term; and

(3)  it is neither obvious nor capable of clear expression.

69.For the above reasons, even if, contrary to my view, it is permissible for P to run inconsistent factual allegations to the effect that the §8 Terms and §13 Terms formed the Alleged Oral Terms and/or the Alleged Implied Terms, I would still hold that the Alleged Implied Terms cannot be implied into the SA and the Memorandum.

Whether D acted in breach of Alleged Oral/Implied Terms

70.In the SOC, there is no allegation that D acted in breach of any clauses under the SA or the Memorandum.  Instead, P’s entire case rests on breach of the Alleged Oral Terms and Alleged Implied Terms.  In light of my conclusions on the Alleged Oral Terms and Alleged Implied Terms, it is unnecessary to consider whether the alleged breaches are made out. 

71.Nevertheless, for completeness, I shall briefly explain why I do not think that P has discharged the burden of proving the alleged breaches. 

72.In respect of the alleged breaches pleaded in §§11 and 19 of the SOC (as summarised in §41 above), they are all predicated on the Alleged Oral Terms and Alleged Implied Terms neither of which have been established by P. 

73.As regards the reasons for suggesting that the 2^nd Report is not binding upon P (as summarised in §42 above), they are wholly without merit and must be rejected:

(1)  Neither the SA nor the Memorandum provides that any party can challenge or reverse the findings of the Auditor, let alone on the basis of the reasons put forward by P.  Indeed, Mr Wong is unable to point to any clause under the SA/Memo which entitles or permits P to dispute the Amount found by the Auditor.  

(2)  It is clear from the evidence that all the amounts pleaded under “Particulars” of §21 of SOC were not amounts recorded in the Ledgers.  Instead, they represented the amounts which P would like to claim against the Company on the basis of some self-serving documents belatedly created by P during or after the audit carried on by the Auditor pursuant to the SA/Memo. 

(3)  Similarly, the evidence shows that all the amounts pleaded under “Particulars” in §§22 and 22A of SOC (i.e. the Alleged Payables) represented the amounts which P contended were payable by D to the Company but no such amounts had ever been recorded in the Ledgers. 

(4)  More importantly, there is no dispute that all the transactions and the documents relied upon by P as well as the 9 questions raised by P had already been considered by the Auditor, and the Auditor did explain in writing, with supporting documents, the reasons why he had not made the adjustments requested or proposed by P.  There is simply no contemporaneous document or, indeed, any credible evidence in support of P’s allegation that the Auditor’s findings were incorrect. 

74.As regards D’s refusal to pay the additional fees for the Examination, it is wholly without merit:

(1)  P has not been able to point to any clause under the SA or the Memorandum which imposes an obligation on D to pay any part of the additional fee for the Examination;

(2)  Although Mr Wong refuses to accept that the Examination was requested by P pursuant to clause 4 of the Memorandum, he is unable to identify any other clause which gives a right to P to request the Auditor to carry out the Examination.  Having decided to exercise his right to require the Auditor to undertake further work in respect of the Ledgers, it was only reasonable for P to bear the fee occasioned by such work. I am unable to see how P could insist on D paying part of the fee for the Auditor to carry out the Examination, still less to accuse D for acting in breach of the SA/Memo by refusing to pay such fee.

Relief

75.The relief sought by P has undergone a substantial change during trial.  Apart from the changes described in §45 above, in his written closing, Mr Wong asks the Court to “enter judgment” against P for an order that:

(1)  “D do pay the sums of HK$2,563,501.62 (Kam Tin Project), and/or HK$50,000 (Ho Man Tin Project) and/or HK$875,109.90 (La Cite Project) to the Company”; and

(2)  “D do render assistance to the Auditor to confirm the correctness of the Company’s ledgers as per the specification as already identified by him, by providing any necessary documents as requested by the Auditor from time to time.”

76.This is despite the fact that no such relief has ever been sought in the SOC.  Mr Wong submits that D would not be prejudiced as the amounts claimed have been mentioned in the SOC.  I am unable to accept Mr Wong’s submission.  The only relief sought in the SOC is an order for payment of HK$3,271,944.02 as pleaded in §22D of the SOC, which has already been abandoned by Mr Wong in his opening.  As there is no application to amend the SOC or the prayer to allow P to claim the 3 sums stated in §75(1) above, it is not open to P to seek such relief in closing. 

77.For all the reasons set out in this Judgment, I reject the grounds put forward by P in this action in support of his case that D had acted in breach of the SA/Memo and that the SA/Memo were terminated or frustrated.  P’s claim is dismissed.

78.In light of the history of the Disputes and the issues raised by the parties in this action, and to avoid any further unnecessary proceedings between P and D in respect of the SA/Memo or the Disputes, it is appropriate for the Court to grant a declaration that the SA/Memo were (and still are) binding upon P and D, and that the findings of the Auditor was (and still is) binding upon P and D. 

79.As for costs, I make a costs order nisi that the costs of and occasioned by this action be paid by P to D on an indemnity basis. It seems to me that it is appropriate to order P to pay costs on a higher scale, in light of my holdings that P’s case on the Alleged Oral Terms and Alleged Implied Terms is wholly without basis and constitutes an abuse of process. 

Mr Paul Wong, instructed by Ong & Chung, for the plaintiff

Mr Ray Kwan, instructed by C.T. Chan & Co, for the defendant