Taiping Trustees Ltd v. Bosc International Company Ltd and Another

HCA 927/2021

[2023] HKCFI 1189

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 927 OF 2021

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J U D G M E N T

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INTRODUCTION

1.Before this Court is an appeal by the defendants (respectively “D1” and “D2”, and collectively “Ds”) against Master Kent Yee’s order dated 1 November 2022 (“Order”) granting the plaintiff (“P”) leave to adduce expert evidence on a list of issues proposed by P (“Expert Issues”).

2.The Expert Issues are set out by P in an amended annex attached to a summons issued by P on 13 June 2022 (amended summons filed on 15 July 2022) under Order 38 rules 4, 36, 37 & 38 of the Rules of the High Court and inherent jurisdiction (“Summons”).

BACKGROUND

3.P is a registered trust company in Hong Kong. P and Taiping Assets Management (HK) Company Limited (“Taiping AM”) are subsidiaries of Taiping Financial Holdings Company Limited (“Taiping Financial”). All 3 companies are members of the Taiping group of companies, which is a group of companies headed by China Taiping Insurance Group Co Limited (“Taiping Group”).

4.D2 (BOSCL) is a commercial bank based in Shanghai in Mainland China. D1 (BOSCI) is an investment bank based in Hong Kong and a subsidiary of D2.

5.This action concerns P’s USD 200m investment in BOSCI-TAIPING Balanced Fund SP (“Sub Fund”) established on around 22 June 2016 which was at all material times a segregated portfolio of the BOSCI Investment Fund SPC set up by D1 and incorporated in the Cayman Islands in June 2016 (“Fund”). P’s investment took the form of subscription on 26 June 2017 for 2 million non-voting shares (“Shares”) in the Fund ie at USD 100 per share.

6.Several contractual documents involving various parties were issued in respect of the investment including:

(1)  a Private Placement Memorandum (“PPM”) issued by the Fund in June 2017 to potential investors and Appendix I thereto (relating to the Sub Fund) (“Appendix I”)[1]

(2)  a Deed of Undertaking dated 20 June 2017 issued to the Sub Fund by D1 (“Deed of Undertaking”) and a Comfort Letter dated 20 June 2017 issued to P by D2 (“Comfort Letter”)[2]

(3)  an Investment Management Agreement (“IMA”) dated 21 June 2017 between the Fund, D1 and Taiping AM with a set of associated investment guidelines relating to the Sub Fund in schedule 3 thereto (“Investment Guidelines”)[3]

7.The Sub Fund was co-managed by D1 and Taiping AM and they were entitled to respectively 0.40% and 0.20% of the total fund management fees (基金管理費) of 0.6% per annum. The performance fee (業績費) was to be distributed as to 80% to D1 and 20% to Taiping AM[4].

8.P’s case is that the Sub Fund’s investment portfolio was managed poorly by D1. As a result, the Sub Fund was only able to redeem P’s Shares at a price of around HKD 81.89 per Share instead of the agreed redemption price of USD 100 per Share, which in turn resulted in losses of over USD 42m for P.

9.P’s claims against Ds are on 3 alternative bases:

(1)  P’s primary claim is that pursuant to the discussions between the parties and the relevant contractual documents including those set out earlier, Ds have agreed by contract to compensate or indemnify P for the difference between the agreed redemption price of USD 100 per Share and the actual redemption price (around USD 81.89 per Share) (“Guarantee Claim”)[5];

(2)  P’s second (alternative claim) is that D1 owed and breached several duties to P, including a duty to use reasonable care to construct an investment portfolio which was suitable for the Sub Fund in light of P’s investment objectives and risk appetite (“Mismanagement Claim”);

(3)  P’s third (further alternative) claim is based on misrepresentation (“Misrepresentation Claim”) and specifically the falsity of the representation regarding due diligence (“Due Diligence Representation”) made by D2 in the Comfort Letter. It consists of 3 separate limbs:

(a)  D2 misrepresented the scope of the due diligence exercise conducted.

(b)  D2 misrepresented the results of the due diligence exercise. D2 represented that the due diligence exercise supported the view that the “Base Assets” (as defined in the Comfort Letter) would be able to generate a certain amount of funds, when the due diligence did not support that conclusion.

(c)  D2’s representation as to the results of the due diligence exercise involved a forecast as to the performance of the Base Assets which, at the time it was made, was made without reasonable care having been taken to ensure that it could be fulfilled.

P’S CASE FOR SEEKING EXPERT EVIDENCE

10.There was no affirmation filed on behalf of P in support of the Summons.

11.Upon being served with the Summons, an affirmation was filed on 10 August 2022 by Du Jian (“Du”), the Chief Executive Officer of D1 on behalf of both Ds to oppose the Summons.

12.It was only in response to Du’s affirmation that a director of P, Chen Dongxia (“Chen”) filed an affirmation on 28 September 2022.

13.P does not seek any expert evidence in relation to the Guarantee Claim. Expert Issues 1 to 4 are in relation to P’s Mismanagement Claim. It is submitted by P that Expert Issue 1 will assist in determining whether D1 has breached the duties owed to P (“Breach Issue”), while Expert Issues 2 to 4 will assist in determining quantum of losses resulting from the said breaches (“Quantum Issue”).

14.Expert Issues 5 and 6 are in relation to P’s Misrepresentation Claim, in that it is submitted by P that Expert Issue 5 will assist in determining the scope and results of the due diligence exercise whereas Expert Issue 6 will assist in determining whether the due diligence exercise was conducted with reasonable care.

THE MASTER’S BRIEF REASONS

15.Master Kent Yee (“Master”) granted the Order after hearing the parties and subsequently gave brief reasons for his decision by letter dated 1 December 2022 (“Brief Reasons”), summarised as follows:

(1)  Expert Issue 1 is necessary for the determination of the Breach Issue within the Mismanagement Claim. The expert evidence will assist the trial judge in determining how D1 constructed the investment portfolio and its suitability for the Sub Fund, which are very technical factual issues. The expert evidence will also assist the trial judge in determining whether D1 had discharged its professional duties, as the trial judge will be slow to find a breach of duty without expert evidence on standards within the profession[6].

(2)  Expert Issues 2 to 4 are necessary for the determination of the Quantum Issue within the Mismanagement Claim. Causation of loss is a live issue between the parties, and expert evidence as to how a hypothetical suitable portfolio would have performed would assist the trial judge in determining that causation issue[7].

(3)  Expert Issues 5 and 6 are necessary for the determination of the Misrepresentation Claim. It will be necessary for the trial judge to understand the scope, results and quality of the due diligence. These are matters of some technicality, and the trial judge will be assisted by expert evidence on those issues[8].

APPROACH ON APPEAL FROM A MASTER’S CASE MANAGEMENT DECISION

16.It has been submitted by Mr Rimsky Yuen SC, appearing on behalf of P, at paragraph 16 of his skeleton submissions that while the present appeal, being an appeal from a master, is a de novo hearing of the summons which led to the order under appeal, the Court should not interfere with a case management decision made by a master without good reason.

17.In this respect, this Court has been referred to a number of first instance judgments in relation to this proposition, including the following (in chronological order):-

(1)  Choy Bing Wing and Hong Kong Institute of Engineers, HCA 309/2015, unrep, 29.09.15 at paragraph 12, per To J

(2)  X v Dr Hung Cheung Tsui, HCPI 67/2014, unrep, 23.05.17 at paragraph 10, per Chow J (as he then was)

(3)  Smart Trike MNE PTE Ltd and others v Chiu Sui Chun and others, [2018] HKCFI 562, HCA 847/2013, unrep 16.03.18, at paragraphs 59 and 60, per Marlene Ng J

(4)  Yong Li Investments Ltd v Lee Sing Leung Robin [2018] HKCFI 1711,unrep, 10 August 2018, at paragraph 15, per Keith Yeung J

(5)  奧斯特企業有限公司 and 向永順, [2020] HKCFI 2935, HCA 1745/2019, unrep, 16.11.20, at paragraphs 4 and 6, per DHCJ MK Liu

18.M Ng J in Smart Trike cited the Choy Bing Wing case in paragraph 60 in relation to appeal against discretion in case management. To J did not refer to any authorities when stating in paragraph 12 of his reasons for decision in the Choy Bing Wing case that the master has wide discretion in case of management matters which the appellate court will not interfere, unless the master has erred in point of law.

19.In the X case, Chow J, as he then was, had stated that “… in relation to an appeal against a case management decision made by a master, it has been said that a judge should not ‘lightly interfere’ with the decision of the master and should only do so for ‘good reason’…”, and he cited Ng Wing Man v Everbest Port Services Ltd, HCPI 780/2012, unrep, 21.03.13.

20.Mr Man SC, appearing on behalf of Ds submits that the Ng Wing Man case is only confined to proceedings under the Personal Injuries List. Bharwaney J has said at the following paragraphs that:-

“2. Courts are reluctant to intervene with case management decisions made below. The Court of Appeal will not intervene unless it can be shown that the decision of the judge was founded on some error of principle or was clearly wrong. Recently, Kwan JA reiterated the principles relating to appeals to the Court of Appeal from case management decisions in Wong Kar Gee Mimi v Severn Villa Ltd [2012] 1 HKLRD 887. She said, at p.897:

‘31. Case management decisions are only subject to appeal in rare circumstances. The appellant faces a “very high hurdle” and must show that the Judge “has gone clearly wrong and made orders which will clearly involve an injustice or an inability for the trial court to carry out its task”, or if the Judge “erred in principle or the order was irrational having regard to the issues that had to be resolved”. It need hardly be emphasized that generally, an appellate court will not interfere with a judge’s exercise of discretion unless the Judge has misunderstood the law or the evidence or the exercise of his discretion was plainly wrong such that it was outside the generous ambit within which a reasonable disagreement is possible.’

3. Although an appeal from a master to a judge in chambers is a hearing de novo, a cogent argument could be advanced that, just as a judge in chambers should not allow an appeal against the costs order made by a master unless it was unreasonable or erred in law, likewise, a judge in chambers ought not to allow an appeal against a case management decision of the master (Hoddle v CCF Construction Ltd [1992] 2 All ER 550 at 550H-551A; Li Kai Yin v Atta-Trans Ltd and Anor, HCPI 196/2009, 18 July 2011 at §10).

4. However, I do not need to decide this point. The present appeal comes before me as the judge in charge of the Personal Injuries List. By O.72, r.2(3) of the Rules of the High Court (“RHC”), control of proceedings in the Personal Injuries List is vested in me.

…

8. Accordingly, I shall deal with this appeal as a hearing de novo, notwithstanding that it is an appeal from a case management decision of the master. However, I give notice that I will not lightly interfere with the case management decision of a master in a case in the Personal Injuries List, and that I will only do so for good reason.”

21.It is submitted by Mr Man that the above said by Bharwaney J was said in the context of an appeal against a case management decision of a master in a case in the Personal Injuries List and that the general approach outside the Personal Injuries List remains unchanged, namely that the appeal will be an actual rehearing as if the application came before the judge in chambers for the first time. Mr Man further refers the Court to the Court of Appeal decision in Kung Wong Sau Hin v CP Lin & Co [1988] 3 HKLR 209, at 212C-F and submits that the settled practice of the Court of First Instance on an appeal from a master is to hear the appeal de novo.

22.Even though what was said by Bharwaney J in the Ng Wing Man case was said in the context of an appeal from a master in a personal injuries case to the judge in charge of the Personal Injuries List, the learned Judge had considered principles relating to an appeal to the Court of Appeal from a case management decision of a first instance judge. Having said this, I accept that an appeal to the Court of Appeal is not an actual re-hearing of the matter which led to the order under appeal.

23.It is clearly stated in the 1^st and 2^nd paragraphs under 58/1/2 in the Hong Kong Civil Procedure 2023 Volume 1, pg 1214 that:

“An appeal from the master to the judge in chambers is dealt with by way of an actual rehearing of the application which led to the order under appeal, and the judge treats the matter as though it came before him for the first time, save that the party appealing, even though the original application was not by him but against him, has the right as well as the obligation to open the appeal…. The judge will of course give the weight it deserves to the previous decision of the master but he is in no way bound by it.… The judge in chambers is in no way fettered by the previous exercise of the master’s discretion, and on appeal from the judge in chambers, the Court of Appeal will treat the substantial discretion as that of the judge, and not of the masters….

A judge hearing an appeal from a master, however, is entitled, if he thinks fit, to adopt the master’s reasoning in his own judgment without setting out the reasoning himself; by so doing the judge does not fail to exercise the discretion conferred on him.”

(underline added)

24.Although the authorities referred to under 58/1/2 (including the Kung Wong Sau Hin case) are pre Civil Justice Reform(CJR), I do not find that there are sufficient authorities to say that the approach of an appeal from a case management decision of a master to a first instance judge is now different. Having considered what has been set out in 58/1/2 above, I am of the view the position remains that on an appeal to a judge in chambers, the judge treats the matter as though it came before him for the first time. The appeal is a de novo hearing of the application which led to the case management decision under appeal and the judge has to exercise his discretion afresh. Having said this, it is clear that the judge may give weight it deserves to the master’s decision, and if the judge thinks fit, to adopt the master’s reasoning.

GENERAL LEGAL PRINCIPLES ON EXPERT EVIDENCE

25.To start with, section 58(1) of the Evidence Ordinance, Cap 8 provides that:

“Subject to any rules, where a person is called as a witness in any civil proceedings, his opinion on any relevant matter on which he is qualified to give evidence shall be admissible in evidence.”

26.Order 38 rule 36 of RHC however sets out as follows:

“36 (1) Except with the leave of the Court or where all parties agree, no expert evidence may be adduced at the trial or hearing of any cause of matter unless the party seeking to adduce the evidence –

(a) has applied to the Court to determine whether a direction should be given under rule 37 or 41 (whichever is appropriate) and has complied with any direction given on the application.

…”

27.The following principles have been set out in Shenzhen Futaihong Precision Industry Co v BYD Co Ltd [2018] HKCA 408 , [2019] HKC 175 (unreported, CACV 63 and 76/2017, 18 July 2018)[9]:

(1)  The Court will allow expert evidence only if it is relevant and necessary; it is a case management duty of the Court to avoid proliferation of unnecessary expert evidence (at paragraphs 9, 12).

(2)  The Court will not only examine pleadings, but also the documents and witness statements to determine the true evidential issues in dispute (at paragraphs 10, 18).

(3)  There must be an evidential basis upon which expert evidence is to be adduced (at paragraphs 51, 56).

(4)  Expert evidence should not be allowed where “the question can be determined on factual evidence and inferences to be drawn therefrom and expert evidence would not be helpful” (at paragraph 25).

(5)  Where a party seeks to ask an expert a broadly framed question, a draft expert report should be produced by that party to assist the Court in assessing relevance and necessity (at paragraphs 19 – 20).

28.In MG Charter Limited v Beijing Caissa International Travel Service Co Ltd [2020] HKCFI 67, having set out the above principles, DHCJ William Wong SC added:

“4. On the question of necessity, the Court should bear in mind that a complex factual issue does not mean that expert evidence is required. The Court is fully capable of “resolv[ing] complicated factual issues on a daily basis” without expert evidence (see So Kai Hau v YSK2 Engineering Co Ltd HCPI 1077/2006, unreported, 6 May 2013 at §46 per Master Li).

5. The framing of expert questions should generally avoid answering the ultimate question to be determined by the Court (unless necessary and appropriate in the particular circumstances) (see Peace Mark(Holdings) Ltd v Chau Cham Wong Patrick HCA 2371/2009, unreported, 2 November 2017 at §§17 – 18 per A Chan J. In Formosa Taffeta Co Ltd v Banque Indosuez [2009] 1 HKLRD 568 at 577, Stone J at §82 said:

‘[A]n expert’s function is to educate and not to advocate, far less to purport to determine the ultimate question at issue in the case, which must be a matter for the court and the court alone.’”

29.What is clear is that in an application for leave to adduce expert evidence under Order 38 rule 36, the burden is on the applicant to show that the proposed expert evidence is relevant to the issues in dispute. The court has to examine the pleadings in determining the application. The court’s discretion as to whether to grant leave is to be exercised within the ambit of its management powers, and the court retains complete control over the use of expert evidence, the purpose of which is to limit expert evidence to what is reasonably necessary to resolve the issues for determination at trial[10].

EXPERT ISSUE 1 - MISMANAGEMENT CLAIM : BREACH ISSUE

30.Expert Issue 1 consists of 7 sub-issues which concern the investment strategies adopted and investment portfolio constructed and maintained by D1.

31.In paragraphs 23(1) and 23(2) of the statement of claim (“SOC”), P’s pleaded case is that D1 was subject to contractual duties to P which encompassed, amongst other duties, to construct an investment portfolio, and invest in individual investments which are suitable to the Sub Fund’s investment objectives and risk appetite and not to manage the Sub Fund’s investments in a way which disregards or fails to give proper regard to the interests and objectives of P. In paragraph 24 of the SOC, P pleaded insofar as may be necessary or alternatively, that D1 was subject to an implied contractual duty to use reasonable care and skill in managing the Sub Fund’s investment portfolio on the grounds of obviousness, business necessity and section 5 of the Supply of Services (Implied Terms) Ordinance, Cap 457.

32.P then pleaded in paragraph 37 that in breach of its duties, D1 adopted an investment strategy and constructed an investment portfolio which were not suitable for the Sub Fund in light of its investment objectives and were inconsistent with the Investment Guidelines. Particulars were then set out thereunder.

33.It is submitted by Mr Yuen on behalf of P that in relation to the proposed Expert Issue 1, namely whether the investment strategies adopted and investment portfolio constructed and maintained by D1 were consistent with and suitable for the Sub Fund considering its investment objectives, it is envisaged that the expert evidence will consist of two aspects, namely (i) how the investment portfolio was constructed; and (ii) whether the investment portfolio so constructed was suitable for the Sub-Fund having regard to its investment objectives.

34.On the other hand, Mr Man submits on behalf of Ds that Expert Issue 1 concerns a factual issue and is not an issue which justifies expert evidence for 4 reasons:

(1)  Suitability to be assessed by the trial judge according to the objective agreed metrics in the Investment Guidelines (“Reason (1)”)

(2)  Expert issues improperly and/or inappropriately formulated (“Reason (2)”)

(3)  P’s attempt to have expert usurp the the trial judge’s function (“Reason (3)”)

(4)  Equality of Arms (“Reason (4)”)

35.I will consider Reasons (1), (3) and (4) first.

Reason (1) – Suitability to be assessed by the Court according to the objective agreed metrics in the Investment Guidelines

36.In respect of Reason (1), it is argued by Mr Man that the Court is to assess suitability of investments by the Sub-Fund with reference to the objective standards, metrics and parameters as agreed and set out in the Investment Guidelines and that this objective comparative exercise does not require expert evidence.

37.In Du’s affirmation, he has pointed out that there are investment restrictions on pages 5 to 6 of Appendix 1 to the PPM (“Investment Restrictions”) as well as the Investment Guidelines, and that according to Du, the question for the Court is simply whether the investment approach and the investment portfolio were constructed in compliance with the Investment Guidelines and the Investment Restrictions and that this exercise is one which the Court is capable of conducting and resolving any dispute parties’ factual witnesses may have in that respect[11].

38.Chen disputes what Du said above, in that P’s case is that D1 was under a duty to adopt an investment strategy and to construct an investment portfolio which was suitable for the Sub Fund in light of its investment objectives and risk appetite, compliance with the Investment Guidelines and Investment Restrictions was necessary but not sufficient to discharge such duties[12]. For instance, any investments made without due regard to a company’s fundamentals, market risk and geopolitical risks etc might constitute a breach of the said duty, even though none of these requirements could – as a matter of practical possibility – have been set out as prescriptive investment requirements[13]. It is further Chen’s evidence that the Investment Guidelines did not merely set out a set of mechanical or bright-line rules but contained a number of highly relevant objectives and guidelines which would require appropriate skill and expertise to properly apply[14].

39.In Chen’s affirmation, he has produced sample “Daily Reports” between 2 October 2019 and 31 October 2019[15].

40.Mr Yuen has pointed out that without assistance from independent experts, the trial judge would have to trawl through the voluminous Daily, Monthly and Quarterly Reports regarding the Sub Fund’s 3 years worth of investment holdings to determine each individual trade that was made, and how those trades affected the investment portfolio.

41.In my view, factual witnesses, albeit they may be professional themselves, can only give evidence as to facts, namely what the investment portfolio consisted of at any one time. They will not be able to give expert opinion as to the issues of, eg whether D1’s investment strategy was suitable in light of the Sub Fund’s investment objectives and risk appetite, and (b) whether D1 complied with the relevant provisions in the Investment Guidelines. I am of the view that these are not questions of fact which the trial judge can resolve by comparing over 3 years’ worth of trade data generated by D1 on the Sub Fund’s investment portfolio against bright-line rules in the Investment Guidelines and Investment Restrictions.

42.I agree with Mr Yuen that only an industry expert can provide an opinion on this and who will be in a position to identify the most material information and present that information to the trial judge. I also find that without the assistance of experts, it would be difficult for the trial judge to properly understand: (1) the commercial or investment context underpinning each investment, and (2) how dozens of investments which the Sub Fund held at any given time were interacted with each other as a composite whole against the commercial or investment context.

43.Having considered the pleadings and the Investment Guidelines, I agree with the Master that the Breach Issue involves technical factual issues and that the trial judge will be assisted by an expert to avoid trawling through the voluminous reports and financial documents and in order to understand the investment portfolio constructed and its suitability for the Sub Fund in light of its investment objectives.

Reason (3) – P’s attempt to have expert usurp the Court’s function

44.It is submitted on behalf of Ds that as on P’s own case, the wording of sub-issues 1.1 to 1.7 of Expert Issue 1 “broadly tracks the wording of the particulars of breach set out in paragraphs 37(1)-(9)” of the SOC[16], and that this essentially means that P is asking the expert to answer, and accordingly plainly trespass on, the very questions of fact and law (or the “ultimate issue”) which it is the trial judge’s function to decide.

45.I agree with the Master that the Breach Issue does not merely consist of factual issues which can be resolved in the absence of any expert opinion. Further, the expert evidence may still be open to challenge/dispute from the parties and ultimately the trial judge will still need to make a determination. The expert evidence will assist the trial judge in making his determination. I do not agree that the expert will usurp the function of the trial judge.

Reason (4) – Equality of Arms

46.It is submitted on behalf of Ds that unlike the usual consumer-bank mis-selling cases, P and Taiping AM are sophisticated parties, being professional investors and licensed asset managers, and that Taiping AM was entrusted with the duty to, amongst other things, review the overall risk positions of the holdings of the Sub Fund and ensure that the Investment Guidelines and accordingly investments made pursuant thereto “are, and remain to be, permitted and suitable investments for the Shareholders”. In this respect, Mr Man referred to the witness statement dated 30 May 2022 of Zhang Cen(“Zhang”), the Deputy General Manager of the Third Party Investment Department of Taiping AM since around 2022.

47.Zhang stated in her witness statement[17] that after P’s subscription of the Sub Fund on 26 June 2017, D1 and Taiping AM had assumed their respective responsibilities pursuant to the IMA, namely D1 to exercise its discretionary management and monitoring role and Taiping AM to review overall risk positions retrospectively over the portfolio. She explained that she was involved in the review of the portfolio and that such review was of the Daily, Monthly and Quarterly Reports prepared by D1. Zhang then went on to explain the limited circumstances when Taiping AM could directly influence the Sub Fund’s portfolio.

48.Suffice to say, I agree with Mr Yuen that Expert Issue 1 raises an issue of professional liability which cannot be addressed and is not normally addressed by factual witnesses, and that Zhang cannot proffer opinion evidence because she had no involvement in D1’s decision-making when D1 constructed and managed the Sub Fund’s investment portfolio. Mr Yuen has further pointed out that it was agreed in the IMA under Clause 3.1 that D1 would have “full and complete discretion to manage the investment disposition and reinvestment” of the Sub Fund’s investment portfolio[18] and that Taiping AM’s responsibilities were only be limited to those specific powers set out in Clause 4.1 of the IMA, which according to P, were mostly ex post facto review[19].

49.In any event, as pointed out by the Master, no matter how professional P (or Taiping AM) is, the trial judge will require the assistance of experts who are bound by the code of conduct and who are obliged to give objective and impartial evidence and they do owe a duty to the court.

Reason (2) – the Expert Issues improperly and/or inappropriately formulated

50.I now come to the formulation of the Expert Issues. As summarised on behalf of P, D’s objections to the formulation of Expert Issue 1 fall into 4 categories, namely (i) the language used is undefined or vague, (ii) the language used assume the answer to certain disputed factual issues (such as the nature or purpose of Ds’ investment strategy), (iii) the issue should be resolved by reference to the Investment Guidelines without expert assistance, and (iv) the experts are being asked to express their view on what they themselves have done.

51.(iii) and (iv) have been considered earlier under Reason (1) and/or Reason (2).

52.As for (i) and (ii), Ds’ objections are amongst others, as follows:

(1)  Sub-issue 1.1 – the references to “large volumes” and “speculation purposes” are vague, obscure and undefined.

(2)  Sub-issue 1.2 – the references to “large volumes” and “short-term trading” are vague, obscure and undefined

(3)  Sub-issue 1.3 – the reference to “excessive leverage” is vague, obscure and undefined

(4)  Sub-issues 1.4, 1.5 – the references to “high-risk assets”, “excessive”, adequately” and “properly” are vague, obscure and undefined

(5)  Sub-issue 1.6 – the two questions posed are not alternatives, but distinct matters

(6)  Sub-issue 1.7 – the reference to “adequate” is vague, obscure and undefined

53.Ds have proposed reformulation of Issue 1 as per the annexure to Ds’ Skeleton Submissions (“Annex 1”).

54.Mr Man has pointed out in the Investment Guidelines, there were provisions as to investment strategy for bonds and fixed income instruments in Clause 3.1 and for equities in Clause 3.2[20] and the composition of the Sub Fund in Clause 4.8[21]. However, these provisions do not appear to touch upon the volume of the buying and selling /trading of the products/equities. Whether the volume was “large” or not and whether the buying/selling/trading was for speculation or not is in my view a proper matter for the expert. It is for the expert to opine whether he considers the volume was large or for speculation or not. I do not find the words vague, obscure and underfined.

55.As for Sub-issue 1.3, although Clause 4.2 in the Investment Guidelines provided for the utilisation of leverage and the relevant ratios, whether there was “excessive” leverage is a proper matter for the expert and I do not find that the reference to “excessive leverage” is vague, obscure or undefined. Similarly, for Sub issues 1.4 and 1.5, although Clauses 4.3, 4.4-4.5, 4.6 and 4.8 in the Investment Guidelines provided certain restrictions on the investments which could be made, in my view, whether the Sub-Fund had invested in assets considered “high-risk”, whether such was “excessive”, and whether the Sub Fund “adequately and/or property” diversify are proper matters for the expert and I do not find the wordings are vague, obscure or undefined.

56.Sub-issues 1.6 and 1.7 are in relation to the Sub Fund’s investment in Argentinean Bonds in early 2019, which was one of the major controversial investments. The two questions in Sub-issue 1.6 are in my view alternatives, and I do not find the word “unsuitable” vague. One of the 3 bases for the Mismanagement Claim concerns whether the investment portfolio was suitable for the Sub Fund. In my view, Sub-issue 1.6, and also Sub-issue 1.7 are proper matters for the expert.

57.As said earlier, it is P’s case that the duty that D1 was under towards P was to adopt an investment strategy and to construct an investment portfolio which was suitable for the Sub-Fund in light of its investment objectives, and that to discharge its duty, compliance with the Investment Guidelines and Investment Restrictions was necessary but not sufficient. Thus, P’s case is that Ds’ duties were not limited to mere compliance with the Investment Guidelines. I am, however, of the view that it is appropriate to include references to the Investment Guidelines as well as to the Investment Restrictions in the opening paragraph of Expert Issue 1, but it is not necessary to include such reference again in each of the sub-issues as the sub-issues are without prejudice to the generality of the foregoing opening paragraph.

58.To summarise, for Ds’ proposed formulation of Expert Issue 1 in Annex 1, I will only allow reformulation in the opening paragraph of Expert Issue 1 along the following lines:

“1. At all material times, were the investment strategies adopted and portfolio constructed… consistent with and suitable for the Sub-Fund, considering its investment objectives, and the parties’ agreement including the Investment Guidelines and the Investment Restrictions? In particular and without prejudice to the generality of the foregoing: ”

59.I do not find it necessary to reformulate the other sub-issues.

EXPERT ISSUES 2 TO 4 – MISMANAGEMENT CLAIM : QUANTUM ISSUE

1.  Expert Issues 2-4 are:

“2. Did the investment strategies adopted and investment portfolio constructed and maintained by D1 cause or contribute to the losses suffered by the Sub Fund.

3. What alternative investment strategies or investment portfolio construction approaches could have been adopted for the Sub Fund considering its investment objectives.

4. What returns would such potential investment strategies or investment construction approaches have generated for the Sub Fund if P invested US$200 million into the Sub Fund on 2 June 2017 and submitted a notice on 22 May 2020 seeking to redeem the entirety of its investment by 30 July 2020.”

60.It is submitted by Mr Man on behalf of Ds that whether the investment strategies adopted and the investment portfolio constructed by D1 caused or contributed to the losses suffered by the Sub Fund is clearly a factual question, and that the quantum claimed by P is USD 42,407, 591.82.

61.However, P has in its prayer (4) of the SOC, claimed, as a further or as an alternative claim, damages against Ds for their wrongful breaches of contract.

62.Further, as pointed out by Mr Yuen, the causation of loss is a live issue between the parties, and that the Expert Issues 2-4 are related to the issue of causation. In the event the trial judge finds that D1 had breached its duties of case and constructed an unsuitable portfolio for the Sub Fund, it would need to determine the extent of the losses that were factually caused by D1’s negligence by applying the well-established “but for” test, which means that the trial judge would need to determine how the investment portfolio would have been constructed where there was no breach.

63.I agree with Mr Yuen’s submissions and that causation is a live disputed issue and find that expert evidence is necessary and that Expert Issues 2-4 will assist the trial judge in relation to the causation issue.

EXPERT ISSUES 5-6 – MISREPRESENTATION CLAIM

64.Expert Issues 5 -6 are:

“5. Whether the Due Diligence Representation was false and untrue, in that the due diligence conducted by D2 and/or its subsidiaries did not support the view that the Base Assets would generate sufficient cashflow to redeem the Shares at the redemption price of US$100 per Share and pay out the dividend of 5.5% per annum.

6. Whether the due diligence carried out by D2 and/or its subsidiaries in support of the Due Diligence Representation was consistent with the standards ordinarily observed by reasonably competent and careful fund managers in making such representations.”

65.It is submitted on behalf of Ds that the question posed in Expert Issue 5 is a pure factual question for the trial judge to decide.

66.As mentioned earlier, P’s pleaded case on the Misrepresentation Claim in the SOC is that the Due Diligence Representation was false and untrue in that D1 did not intend to cause the Sub Fund to invest in a known and fixed basket of assets and that its intention was to gradually change the Sub Fund’s investment strategy and invest in an increasingly risky basket of assets, or alternatively, it may be inferred from what has been pleaded that D1 and its subsidiaries did not conduct any or any adequate due diligence on the Base Assets, or alternatively, the due diligence exercise did not support the view that the Base Assets would be able to generate sufficient funds to redeem the Shares at the Redemption Price and to pay out a dividend of 5.5% per annum[22].

67.In Ds’ defence, what is pleaded above by P is denied, and that it is Ds’ case that D1 had conducted due diligence on the Base Assets, by performing a stock selection model based on HK stocks (HK Stocks Analysis Report) and one based on US stocks (US Stocks Analysis Report) before D2 executed the Comfort Letter[23].

68.However, as pointed out by P, none of these matters which the factual witnesses, including those of Ds, had addressed in their witness statements.

69.In my view, even if a factual witness may be able explain the headings and the figures in the Analysis Reports, and/or the HK/US stocks selected, the issue is whether such due diligence would support that the Base Assets would generate sufficient cashflow to meet the agreed Redemption Price and the dividends. I agree with the Master that the trial judge will be assisted by the expert evidence on the nature and scope of the due diligence work as such are technical matters.

70.As for Expert Issue 6, it was submitted on behalf of Ds that the question posed is irrelevant to any pleaded issues, in that P’s pleaded cause of action is based on the falsity of the representation that the due diligence supported the view that the value of the Base Assets was expected to be able to generate the agreed returns, and that it is not alleged by P that there was any independent breach that the due diligence was below the reasonable standard. Ds also complained about the lack of particulars as to the standards ordinarily observed by reasonably competent and careful managers.

71.It has been pleaded by P in paragraph 45 of the SOC that the Due Diligence Representative involved a forecast which, at the time it was made, was made without reasonable care and that D2 is liable to P under section 3 of the Misrepresentation Ordinance, Cap 284 and under section 108 of the Securities and Futures Ordinance, Cap 571. It is submitted on behalf of Ds that if reliance is placed on section 108(7)(iii) of the SFO which concerns a “forecast” misrepresentation, P will need to plead and prove that (i) there was a “forecast” at the time not justified on the facts then known to the maker and further (ii) the “forecast” was made without reasonable care having been taken to ensure the accuracy of those facts, but none have been pleaded. There have however been no application by Ds to strike out this part of P’s claim or to seek any further and better particulars.

72.Suffice to say, I agree with the Master under the Misrepresentation Claim, the issue is first whether the Due Diligence Representation was untrue and second, whether the due diligence carried out was consistent with standards ordinarily observed by reasonably competent and careful fund manages, and that the expert will assist the trial judge on these issues.

PROPOSED EXPERT

73.I understand that P’s proposed expert is Mr Pawan Malik who has given expert evidence before the Hong Kong courts on investment related matters. There is no challenge to the qualifications and expertise of Mr Malik.

CONCLUSION

74.In light of all said above, save for the reformulation as indicated earlier, I dismiss the appeal. Ds have essentially failed in their appeal and costs should follow the event. I order Ds to jointly and severally pay P’s costs, with certificate for two counsel. Such costs are to be summarily assessed, and paid by Ds within 14 days of assessment. P to lodge the statement of costs within 14 days hereof and Ds to lodge the list of objections within 14 days thereafter.

Mr Rimsky Yuen SC and Mr Joshua Chau (written submissions only), instructed by Dechert, for the Plaintiff

Mr Bernard Man SC and Mr Byron Chiu, instructed by Clifford Chance, for the 1^st and 2^nd Defendants