Hope Rich Consulting Ltd v. Lau Ming Fung

HCA 1263/2023

[2025] HKCFI 491

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1263 OF 2023

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D E C I S I O N

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Introduction

1.This is an appeal by the Defendant (“D”) against the costs order of a Master (“the Master”) made on 26 August 2024 that the costs of D’s Summons filed on 27 March 2024 (“the Summons”) be in the cause (“the Costs Order”). The appeal was heard by this Court on 17 December 2024 with the Decision reserved. This is the Court’s Decision.

The pleadings of the parties

2.In the Statement of Claim filed on 4 January 2024 in this action (“SoC”), the Plaintiff (“P”) sought damages for breach of an agency agreement entered with D “in a sum not less than HK$5,000,000”.

3.According to the SoC, P was in the business of providing consultancy services. D wished to sell his 70% shares (“D’s Shares”) in a company named Melofield Nursery and Landscape Contractor Limited (“MNLC”) and engaged P to seek potential purchasers for him. An agency agreement was signed on 12 October 2022 whereby P agreed to provide consultancy and agency services to D (“the Agency Agreement”).

4.The following terms of the Agency Agreement were, inter alia, pleaded in the SoC: (1) D agreed to pay P not less than 1% service commission of the consideration as stated on the provisional sale and purchase agreement for D’s Shares; (2) D agreed to sell D’s Shares at the proposed sale price of HK$59,500,000 (“Proposed Sale Price”); (3) if the sale price stated on the provisional sale and purchase agreement exceeded the Proposed Sale Price, the surplus would be paid by D to P as further service commission.

5.This term of the Agency Agreement was also pleaded at paragraph 10(7) of the SoC: “If the Defendant breaches the agreement, the Defendant agrees and promises to compensate the Plaintiff’s direct and/or indirect loss in a sum not less than HK$5,000,000” (“the Subject Clause”). In the rest of the SoC, however, there was nothing pleaded to explain how the figure of HK$5,000,000 was arrived at and what was P’s loss, direct or indirect, that should be compensated. The nature of the Subject Clause was later made the subject matter of the Summons for determination by the Master.

6.In the SoC, it was also pleaded that (1) P had found a potential purchaser for D’s Shares who was interested to purchase them at the Proposed Sale Price; and the potential purchaser had signed a provisional sale and purchase agreement and paid a cashier’s order of HK$5,000,000 as initial deposit; but (2) in breach of the Agency Agreement, [D][1] refused to sign the provisional sale and purchase agreement until numerous additions, conditions and demands were met. It was pleaded further and in the alternative that D had prevented a deal from occurring in breach of the Agency Agreement.

7.It was thus pleaded at §21 of the SoC: “As a result, pursuant to the term as stated in paragraph 10(7) above[2], [P][3] is entitled to a sum of not less than HK$5,000,000 in damages.”

8.At §16(3) of the Defence filed on 30 January 2024 (“Defence”), D expressly raised the issue that the Subject Clause was unenforceable and liable to be struck down as a penalty clause: (1) under the Agency Agreement, P would be entitled to a commission being 1% of the purchase price of HK$59,500,000 amounting to HK$595,000; (2) the Subject Clause is not and could not have been a genuine pre-estimate of P’s damages by any measure, as the sum of HK$5,000,000 “is indisputably and absolutely extravagant and unconscionable in amount in comparison with the greatest loss that could conceivable [ sic ] be proved to have followed from any alleged breach by the Defendant”.[4]

9.In the Reply filed herein on 19 March 2024 (“Reply”), on this issue of a “penalty clause” as raised by D, P simply pleaded: “Paragraph 16(3) is specifically denied, as the liquidated damages of HK$5,000,000 is reasonable considering the consequential and/or indirect loss (“間接經濟損失”) arising from the failure of the Defendant to sell his 70% share in MNLC, including the failure of Raymond Lui to sell his 30% shareholding in MNLC.”

10.Remarkably, it was not pleaded anywhere in the Reply as to why the failure of Raymond Lui to sell his 30% shares in MNLC would result in any consequential and/or indirect loss to P, especially when Raymond Lui was not even a party to the Agency Agreement.

The Summons

11.In light of the pleadings filed by P, it is understandable that on 27 March 2024, D filed the Summons[5] seeking determination as a preliminary issue whether the Subject Clause is liable to be struck down as a penalty clause and accordingly invalid and/or unenforceable.

The hearing before the Master

12.The hearing of the Summons was held before the Master on 26 August 2024. At the outset of the hearing, the Master invited “inputs” from counsel on both sides. He questioned counsel for P whether the commission would be payable upon execution of the provisional sale and purchase agreement.[6] He then raised the point that “but let us be a little bit academic here”, the commission may not necessarily be just 1 % of the sale price; if the actual sale price was HK$70 million, then the surplus over the Proposed Sale Price (i.e. the price of HK$59.5 million) would also be paid to P.[7] Counsel for D responded[8], “In principle, it could be [more than 1% of the Proposed Sale Price].” The Master however noted[9] that in the present case, the draft sale and purchase agreement produced by P was actually at the Proposed Sale Price – in other words, there was no surplus on top of the 1% commission.

13.The Master then turned to other issues including whether D could make any objections or negotiate any terms at all with the potential purchaser and whether D could choose his purchaser[10].

14.Eventually, the Master turned to the critical issue in the Summons and raised the following questions for counsel for P or made these comments:-

(a)  “And Mr. Raymond Chui (Lui?) is not a party to this agreement, so why would Raymond Lui’s loss as a 30 per cent shareholder become a loss of [P]?”[11]

(b)  “So are you saying that actually Raymond Lui is a party to the agreement?”[12]

(c)  “So are you saying that actually there had been an agreement between the two shareholders, [D] and Mr. Raymond Lui?”[13]

(d)  “It is not the pleaded case here.”[14]

(e)  “But if you tell me by this sentence, Mr. Raymond Lui somehow becomes a party to the contract and his contract becomes – sorry, his interest becomes so important in construing the entire contract, I would have some difficulty. But I don’t think it’s impossible, but to the very least I think your pleaded case doesn’t reflect that, isn’t it?”[15]

(f)  “But this is the disconnect. What – now, yes, you say so, but why would Mr. Raymond’s loss as a minority shareholder be relevant to the qualification of [$]5 million? The logic hasn’t been pleaded.”[16]

(g)  “… So long and short, all these points would have to be uttered… in the pleading… So here, you only have one sentence saying, well, this [$]5 million is reasonable taking into account the loss of Raymond Lui. But what is Raymond Lui’s interest related… in relation to the contract? It’s in a vacuum.”[17]

(h)  “It’s not good enough I must say.”[18]

(i)  “And then deriving from there the [$]5 million. Because, now, if Mr. Raymond Lui’s loss as a minority shareholder is really relevant – well, 5 million may well be possible, i.e. a pre-estimate of loss, but on the face of it, I think Mr. Wong has a point to say your 1 per cent commission is only [$]595,000. Well, why would their refusal to complete lead to a [$]5 million compensation? It doesn’t quite flow.”[19]

(j)  “Yes, his case [i.e. D’s case] is easier to understand.”[20]

15.It is significant to note that after the Master had said he was trying to understand her case, counsel for P conceded: “I accept it as such that there must be more explanation as to how that …”[21]

16.Then it was the Master himself who raised the issue of P amending its pleading: “… I wonder if giving you a bit of time, you can -- you may tell me whether you may want to amend your pleading and what direction you are amending… If you plan to amend your pleading, I will rethink, well, would this case perhaps require something more and maybe not suitable for disposal today? Now, of course, this will be unfair to Mr. Wong [i.e. counsel for D]… This will certainly be unfair.”[22]

17.The Master then considered a passage in Hong Kong Civil Procedure and observed: “So in other words Sir Thomas Bingham said when handling Order 14A, we proceed – the statement of claim here is already the best case the plaintiff would put forward. However, if Ms Leung [i.e. counsel for P] now tells me this is not their best case, their best case is something else. For example, Raymond Lui is actually a party – maybe, I don’t know, it’s their job – or they say, well, the [$]5 million loss need to take into account Mr. Raymond Lui’s interest because your client, albeit the majority shareholder, has no choice on the buyer. He – I don’t think he has – she has spelt it out.”[23]

18.The Master then indicated, “… They [i.e. P] may have a better case to plead. I want to give them a bit – less than 30 minutes to think and tell me what is their best case and we proceed from there and you [i.e. counsel for D] will have a proper chance to respond… And on costs, that will certainly be a matter affecting my discretion.”[24]

19.The Master went on to say, “Maybe this – Ms Leung [i.e. counsel for P], you just have this 30 minutes to think and tell me, first, if you may want to amend any parts of your pleadings, the statement of claim and reply included. And I do not expect you to have a drafted amended pleadings… but at least you tell me what is your direction of the amendment, what is likely to be included in the amended pleading, if any. Now of course, you can say, ‘Master. I don’t want to amend my pleading at all.’ Fine. Then we proceed on the basis of the present materials to determine the legal outcome under 14A. That’s perfectly fine.”[25]

20.Then the Master remembered that he should hear from counsel for D and asked him if he had any problem with that proposed course. Counsel for D responded: “I do not have any problem. My only slight concern is that I heard what my learned friend has said about Raymond Lui not being a party to this agency agreement. So however much they would try to frame their case, it seems that it wouldn’t – the loss of Raymond Lui can’t fall under the loss of [P].” In response, the Master observed, “That I also have the same difficulty.”[26]

21.Later on, the Master reiterated: “So when you say, well, the court need to take into account third party interest and that third party being Raymond Lui, Raymond’s Lui’s connection to this penalty clause need to be spelled out, but I cannot see any from the pleading… That’s why I take it up for so long with Ms Leung [i.e. counsel for P] on this.”[27]

22.The Master then adjourned the hearing for 30 minutes for counsel for P to consider the issue of amendment.

23.After the adjournment, counsel for P went to some lengths to try to explain the direction of the amendments that she proposed to make to P’s SoC. Counsel for P accepted that costs of and occasioned by the amendments be to D in any event but contended that costs of the Summons would be another matter.[28]

24.The Master then turned to counsel for D: “Now, you now hear Ms Leung is going to… re-engineer her case, so somehow there may be a rather substantial amendment to the statement of claim, so… having heard that, what do you say?” Counsel for D responded: “… I still cannot figure out how -- Raymond Lui’s part of the loss or profit or whatever arising from the transaction could be construed to be attributable or to be treated as [P’s] loss or indirect -- whether direct or indirect.”[29]

25.Counsel for D went on to say, “… well, the pleadings – well, I believe they had plainly accepted that it’s not good enough, so that they have to make substantial amendments to it and – but they haven’t proposed all these amendments before this hearing at all. So that is why we are all here and that is why legal fees… have been incurred.” Counsel for D thus asked for costs of and occasioned by the Summons.[30]

26.The Master then pointed out to counsel for D, “… but, now, even if Ms Leung does not propose any amendment, your application also has one inherent weakness because 1 per cent of the commission based on the intended sale price, you’ve worked out the mathematics of these two figures… But when you say, well, that is a penalty clause, you haven’t taken into account the mechanism that if the price is more than [$]59.5 [million], that would feature in part of the commission fee. So the commission fee is not always just 1 per cent. Of course, the actual potential buyer identified was only willing to pay [$]59.5 [million], but there is possibility that the intended buyer identified was willing to offer a higher price. Now, if he’s willing to offer a higher price, the commission is not just [$]595,000, it could be more.”[31]

27.On that one inherent weakness identified by the Master, counsel for D responded firstly by pointing out that in the case, D had already agreed to the Proposed Sale Price of $59.5 million, and any [potential] buyer would only want to buy at a lower price; secondly, on the then pleaded case, the $5 million did not seem to bear any connections to the estimated loss of P; “… at present, it’s just a figure plucked out of thin air…”[32]

28.The Master later turned to the question of how the Summons should be dealt with: “But I also want to ask if we dispose of the Order 14A summons this way without kind of striking out that [$]5 million claim, should I say the Order 14A summons is dismissed or it is somehow withdrawn with leave?”[33] Counsel for D later responded, “Or perhaps upon their undertaking [to amend the SoC], then we can withdraw it.”[34]

29.At the end of the hearing, the Master granted leave for D to withdraw the Summons upon the undertaking by counsel for P to amend the SoC within 28 days by way of a proper application. That was on the understanding that costs of the amendments be to D in due course.

30.However, in relation to the Summons, the Master ordered that costs be in the cause. He gave the following reasons (“Reasons for Costs”)[35]:

“As to the costs of the summons, having heard counsel, I have come to the view that costs should be in the cause with certificate for counsel for the simple reason that the withdrawal of the summons was occasioned by the plaintiff's indication of having to amend the statement of claim.

So on one view, the plaintiff's stance caused the issuance of the Order 14A summons in the first place. However, I also take into account the countervailing consideration. First, it doesn't seem to me the defendant had sought, had requested further and better particulars or to seek any unless order that such particulars should be provided before issuing Order 14A summons.

Also, even without the amendment indicated by the plaintiff, I see some inherent weaknesses in the defendant's application, including the potential commission is not limited to 1 per cent of the intended price as set out in the agency agreement. And secondly, there appear from a totality reading of all the affirmation some intrinsic factors related to the qualifications of the 5 million, which the court is able to see and to question counsel for the plaintiff throughout today's hearing. So I think the defendant should have been able to see the same as well.

So I don't say the summons is so one-sided that, well, the defendant must be able to win if the plaintiff hasn't indicated those amendments. So I think, well, it's actually quite debatable, put it this way. But anyway, given the plaintiff's indication, it doesn't -- the summons doesn't have to be determined today and I thank both counsel's sensible positions in relation to this matter.

So going back to the costs of the summons, including today's hearing, they will be in the cause with certificate for counsel.”

The Appeal against the Costs Order

31.On 3 September 2024, D filed a Notice of Appeal to appeal against the Master’s Costs Order. The appeal hearing was held before this Court on 17 December 2024.

32.On appeal, one of the main submissions by D[36], in essence, was that during the hearing, it was the Master himself who prompted counsel for P to consider amending the SoC to make good P’s pleaded case; and after the 30-minute break, counsel for P sought leave to make amendments - indeed, substantial amendments were made to the SoC in due course. Counsel for D thus submitted on appeal that P’s proposed substantial amendments gave rise to a huge turn of event that completely changed the legal landscape of the matter and as a result, the Summons had become “academic” and for that reason it was withdrawn. In such an event, costs should have been awarded to D.

33.Counsel for D further submitted that whilst the Master stated in his Reasons for Costs that the Summons was “actually quite debatable”, he had “deprived D of an opportunity to properly argue on the application.” It was contended that in the interests of justice and fairness, “either Master should allow the application [to proceed] and be argued, or if Master decided to accede to P’s request for amendments, then it would only be fair that D be awarded costs.”[37]

34.On the other hand, Counsel for P on appeal sought to uphold the reasons given by the Master for the Costs Order.[38] It was further contended, inter alia, that D could not complain there was no determination of the Summons as it was withdrawn by D, and that D did not genuinely withdraw by reason of P’s proposed amendments to the SoC but because D acknowledged that the application was unlikely to succeed. Counsel for P further submitted that if D were to be awarded costs, it would mean that he was successful in his application by the Summons; but in the present case, D could in no way be said to be successful.[39]

Discussion

35.In general, a judge in chambers will not allow an appeal from a master’s costs order unless it is unreasonable or the master erred in law.[40] “As this is an appeal as to costs only from the discretion of the master, such application should not be allowed unless it can be shown that the order made by the master was unreasonable or erred in law, i.e., if he either failed to take into account proper matters or took into account matters that should not have been taken into account.”[41]

36.Having carefully considered the transcript of the proceedings before the Master, the materials before the Court and the submissions by the parties on appeal, it is my view that the Costs Order was unreasonable and the Master had erred in law. For that reason, the appeal should be allowed.

37.In §14 above, some of the more significant comments made by the Master during the hearing were already set out to show his view then that he had difficulties in seeing the connection between the claim of damages “in a sum not less than HK$5,000,000” and P’s loss of commission of HK$595,000 entitled under the Agency Agreement (“the disconnect”). Indeed, having now carefully considered the pleadings and the affirmations filed by the parties that were before the Master, I am satisfied that the Master was well justified in making those critical comments or forming the view that there was the disconnect.

38.On the pleadings and all the materials before the Master, the Subject Clause was patently bad as a penalty clause and no doubt that had prompted the Master to suggest to counsel for P to consider amending the SoC to make good P’s pleaded case. Indeed, at the hearing before the Master, counsel for P also accepted that more was required to explain the disconnect.[42] The Master thus gave leave to P so that counsel for P could “re-engineer her case” and make rather substantial amendments to the SoC.[43]

39.When after the break, counsel for P came back and asked for leave to amend the SoC, that was clearly an acknowledgement that the SoC was defective at least as regards the Subject Clause; otherwise, there was simply no need to amend the SoC at that stage of the proceedings. As alluded to by the Master, P could have gone on to oppose the Summons without the amendments if the Subject Clause was considered by P to be valid.[44]

40.In those circumstances, I agree with the submissions of counsel for D on appeal that given such a huge turn of event, the legal landscape had changed and the Summons had become “academic”. In such a case, D was well justified to withdraw the Summons but in all fairness, he should not have been deprived of his costs. Had P properly amended the SoC prior to the hearing before the Master, in all likelihood, the Summons would not have been proceeded with. However, at no time prior to the hearing had P even suggested that it would amend the SoC.

41.In Perrine Chamonix Limited v Star League Limited and Anor., HCA 1139/2017, unreported and dated 13 September 2017, a case relied upon by D in this appeal, Deputy High Court Judge William Wong SC stated at §28:

“… if a plaintiff or an applicant withdraws an action or a summon because the defendant had done something, after the issuance of writ of summons or summons, which renders it unnecessary or academic for the plaintiff or the applicant to proceed with the action or application, the court has a full discretion to award costs to the plaintiff or applicant after taking all the circumstances of the case into consideration. In Re Peaktop Technologies (USA) Hong Kong Ltd[2007] 4 HKLRD 207, Barma J (as he then was) at §8 said:

‘Further, it seems to me that where an applicant’s application is doomed to failure by reason not of anything which he has done or not done, but because of an act of the respondent which is within its control and out of the hands of the applicant and is, further, a step which could have been taken either prior to the application being made or at an earlier stage in the application so as either to obviate the possibility of the application being made, or to minimise the costs associated with it, it may well be appropriate to recognise this by an appropriate costs order.’ ”

42.The guiding principle on costs is fairness and justice in the circumstances. Had proper amendments been made prior to the hearing before the Master, that would have obviated the possibility of the application under the Summons being made. Indeed, during the proceedings, the Master himself raised that if P planned to amend the pleading, whether it might not be suitable to dispose of the Summons at the hearing then for it would certainly be “unfair” to D[45].

43.In his Reasons for Costs, the Master pointed out that there were “countervailing consideration[s]” against D:

(i)  D should have sought further and better particulars or an unless order for such particulars (“First Reason”);

(ii)  The Master saw some inherent weaknesses in D’s application, including that the potential commission was not limited to 1% of the intended price because any surplus of the offered price over the Proposed Sale Price would also be paid to P (“Second Reason”);

(iii)  From a reading of all the affirmation(s) in totality, there appeared to be some intrinsic factors related to the “qualification” [or quantification] of the $5 million which the Master could see and which he questioned counsel for P throughout the hearing and D should have seen them too (“Third Reason”); and

(iv)  The Summons was “actually quite debatable” and it was not the case that D must have won had the amendments not been proposed (“Fourth Reason”).

44.In my view, these “countervailing consideration[s]” as identified by the Master are questionable in the circumstances of the present case.

45.As regards the First Reason, P already had three opportunities to explain the disconnect but still failed to do so: (1) in its Reply; (2) in P’s Supporting Affirmation[46]; and (3) at the hearing before the Master. In those circumstances, it is not right to turn around and say to D that he should have asked for further and better particulars earlier.

46.Further, as counsel for D contended, it is incumbent upon P to make good its own pleaded case: see the often-quoted observation of Sir Thomas Bingham M.R. in E (A Minor) v Dorset C.C. [1995] 2 AC 633 at 693-694 that “applications of this kind are fought on ground of a plaintiff’s choosing, since he may be generally assumed to plead his best case…”[47] Where in the present case there was a glaring disconnect[48] between the 1% commission (i.e. HK$595,000) entitled under the Agency Agreement and the extravagant and disproportionate sum of damages being claimed (“in a sum not less than HK$5,000,000”), D was plainly justified to challenge the validity of the Subject Clause as a penalty clause on P’s pleaded case without first having to seek further and better particulars.

47.As regards the Second Reason, according to P’s pleaded case, and as observed by the Master and counsel for D, there was simply no surplus arising out of the price being offered by the interested purchaser over the Proposed Sale Price and therefore on the pleaded facts, P should only be entitled to commission of 1% of the Proposed Sale Price (1% being HK$595,000) and not the inflated amount of “not less than HK$5,000,000”. The Master himself observed that it was a point “a little bit academic”.[49]

48.More importantly, it was not the case of P that there was contemplated any potential purchaser willing to offer a price well over the Proposed Sale Price. Instead, P’s case as asserted by its counsel at the hearing before the Master was that the excessive amount well over the 1% commission of HK$595,000 was somehow related to Raymond Lui’s inability to sell his 30% shares in MNLC, thereby somehow resulting an indirect loss to P of “no less than HK$5 million”.

49.The essence of a penalty is a payment of money stipulated as in terrorem of the offending party, or was extravagant and unconscionable in amount in comparison with the greatest loss that could conceivably be proved to have followed from the breach, rather than a genuine covenanted pre-estimate of the damage. The test is whether the clause is out of all proportion to the innocent party’s legitimate interest in enforcing the contract. It is a question of construction to be decided upon the terms and inherent circumstances of each particular contract, judged as at the time of the making of the contract, not as at the time of the breach.[50]

50.In the present case, as set out in §45 above, P had repeatedly failed to explain to the Master the circumstances as to why Raymond Lui’s loss arising from his inability to sell his 30% shares would become P’s indirect loss. It begs the question: what legitimate interest P would have in Raymond Lui’s ability to sell his minority shares in MNCL? None of these issues were addressed in P’s pleadings nor P’s Supporting Affirmation, despite the fact that D had expressly raised the issue of a penalty clause in his Defence.[51]

51.Applying the legal principles set out in §49 above to the present case, on the pleadings and materials before the Master, when there was no satisfactory explanation from P to show its legitimate interest in Raymond Lui’s ability to sell his minority shares or to clarify the issue of a disconnect, the Subject Clause should have been ruled to be a penalty clause.

52.As regards the Third Reason, I fail to see what contents in P’s Supporting Affirmation provide the connection. The relevant contents are set out in §5 thereof as follows:

“5. As to whether a preliminary hearing/trial is appropriate, I will leave legal arguments to be made to the Court by my legal representatives. Suffices it to say:-

(1) Whether the damages now sought in the Statement of Claim is “extravagant and unconscionable” and not a genuine pre-estimation of the Plaintiff's damages, is a factual issue, and will determine on a whole host of factual background.

(2) As stipulated in the footnote of the Agreement dated 12^th October 2022 as exhibited as LMF-1 to D's Aff, the Defendant accepted knowledge of the familial relationship between the Plaintiff and the other shareholder of Melofield [i.e. MNLC]. This refers to the fact that my brother, Lui Yau Bun Raymond, was the remaining 30% shareholder of Melofield.

(3) In other words, whether or not there were “indirect” economic losses caused to the Plaintiff due to the fact that my brother was unable to sell his 30% share in Melofield along with the Defendant's 70%’s share, will be relevant in determining whether HK$5 million was a genuine pre-estimation of the Plaintiff's damages.

(4) How I became a director of Melofield, and how my brother became a shareholder of Melofield, in fact involves a complicated factual background. We had invested into Melofield after discussion with the Defendant, and was promised certain powers within Melofield, with a long-term view to then sell Melofield to a willing buyer. This formed the context of why the Agreement was made in the first place, and confirmed the parties as to what clauses to insert into the Agreement. This factual background will no doubt also be important in the determination of whether the Damages Clause should be struck out, and whether the Damages Clause was a genuine pre-estimation of the Plaintiff's damages.”

53.First, in §5(2) quoted above, it was asserted that Raymond Lui was a 30% minority shareholder of MNLC and that there was a “familial” relationship between P and Raymond Lui. It should be observed that P is a limited company and therefore it is simply wrong to say that it could have a “familial” relationship with Raymond Lui (the minority shareholder of MNLC). In law, P is a legal entity separate from its manager (Paul Lui) and its sole director and shareholder (Cheung Chak Mei, Paul Lui’s wife).

54.Further, there is nothing in §5 quoted above to explain why the loss of the brother of its manager should be attributed to P as its loss. Had there been a proper basis, it should have been pleaded in the Reply or deposed to in P’s Supporting Affirmation. I fail to see any satisfactory attempt to explain the disconnect in P’s pleadings or P’s Supporting Affirmation.

55.The Master said in the Reasons for Costs that in the affirmation there appeared to be some “intrinsic factors” that he was able to see and question counsel for P throughout the hearing. But the bottom line is that despite all that questioning at the hearing, the Master still found the disconnect not properly unexplained.[52] In any event, D was entitled to know the case he had to meet. The indication of some vague “intrinsic factors” were simply not good enough when the issue of a penalty clause had already been specifically raised in the Defence and not answered in the Reply nor in P’s Supporting Affirmation.

56.As regards the Fourth Reason, for the reasons given above, had it been necessary to rule on the Summons, I would have ruled in favour of D on the basis of the pleadings, affirmations and materials before the Master. The Master suggested that the Summons was “quite debatable” but it also appears that counsel for D was not given full opportunity to address and be heard on all of such “countervailing consideration[s]” as identified by the Master, before being denied the costs of the Summons.

57.To complete the story, I should point out that substantial amendments were indeed made by P to the SoC on 23 September 2024 (“Amended SoC”) which included the following (in italic):-

“9A. The Defendant and the Lui brothers discussed and understood that if the Defendant was successful in selling his 70% share in Melofield [i.e. MNLC], Raymond Lui would also be able to sell his 30% share in proportion to the share price at which the Defendant was able to sell. They also understood that, in the contrary, if the Defendant refused to sell his 70% share in Melofield, Raymond Lui would also be unable to sell his 30% shares, as it would be very difficult to find a buyer willing to purchase a minority shareholding in Melofield while the Defendant retained control. If so, then Raymond Lui will be precluded from any profit that he may earn from the sale of his shares in Melofield.”[53]

“10(7) If the Defendant breaches the agreement, the Defendant agrees and promises to compensate the Plaintiff's direct and/ or indirect loss in a sum of not less than HK$5,000,000（“如甲方違約，甲方承諾及同意賠償乙方不少於港幣500萬之直接和間接經濟損失”）.  This direct and/or indirect loss (the "Loss") refers to the loss that Raymond Lui will suffer by not being able to sell his minority 30% share in Melofield due to the fact that the Defendant refuses to sell his 70% majority shareholding, causing him to miss out on a profit of at least HK$5,000,000.

and

10(8) If there were terms that needs perfecting, parties may discuss and agree upon supplemental terms (“如有未完善條款，雙方可以同意協商作出補充協議 ”). As the Agency Agreement was, after all，not professionally drafted, the parties agreed that they may discuss and agree upon further terms to perfect the execution of the Agency Agreement.

10A. The terms of the Agency Agreement were discussed and agreed between the Defendant and the Lui Brothers shortly prior to its signing. In particular, The Loss was discussed and agreed between the parties (i.e. between the Defendant and the Lui Brothers), who considered that if the Defendant was able to sell D's Melofield Shares at the Proposed Sale Price, then Raymond Lui, who held 30% shares in Melofield, will at least be able to sell his shares at a total of HK$25,500,000, giving him a profit of HK$10,500,000 (over his original investment of HK$15,000,000 to purchase his shareholding in Melofield).[54] As such, the Plaintiff and the Defendant agreed that the estimated damages caused to the Plaintiff (and indirectly to the Lui brothers, in particular to Raymond Lui) would be no less than HK$5,000,000 (which is less than half of the projected profits Raymond Lui would enjoy if he was able to sell his 30% shares along with the sale of D's Melofield Shares).[55] [Emphasis added]

10B. Given that the Plaintiff was affiliated with the Lui brothers, the parties understood that the Plaintiff would secure a buyer who was ultimately willing to purchase 100% of the Melofield shares.”

58.It is remarkable that it is now pleaded in the Amended SoC that there was an agreement between P and D that the estimated damages caused to P would be no less than HK$5,000,000. This is a new allegation raised by P for the first time in the Amended SoC.

59.Had all these substantial amendments been included in P’s SoC or its Reply, or P’s Supporting Affirmation, that would have obviated the need of an application by D by way of the Summons to determine the issue of a penalty clause.

60.At the appeal hearing, I actually asked counsel for P this question: if the proceedings before the Master had been adjourned for P to formally amend the SoC and upon resumption of the hearing, D decided to withdraw the Summons because of the amendments, what should the costs order be? Counsel for P fairly conceded that in that event, costs should be awarded to D. If that is the case, I see no real difference to the present situation where D already withdrew the Summons at the end of the hearing in order to avoid the further costs of an adjourned hearing.

61.For the above reasons, it is my view that in all the circumstances of the present case, fairness and justice does require that the costs of the Summons be awarded to D.

62.I am therefore satisfied that the Costs Order made by the Master was unreasonable and the Master had erred in making it. I shall therefore set it aside and substitute it with an order that the costs of the Summons be to D. As D has succeeded in this appeal, I shall also award costs of the appeal to D.

63.At the end of the appeal hearing, counsel for D presented statements of costs to the Court relating to (1) the Summons (totalled HK$247,000); and (2) the appeal (totalled HK$137,778.50). D invited the Court to make a summary assessment of such costs in the event that D prevails in the appeal. Having considered the statements and heard submissions from the parties, I summarily assess the costs of the Summons to be HK$190,000 and those of the appeal to be HK$100,000.

Judgment

64.For the above reasons, I allow D’s appeal and grant the following orders:-

(1)  The Master’s costs order dated 26 August 2024 be set aside and be substituted with an order that the Plaintiff do forthwith and in any event pay to the Defendant the costs of the Summons filed by the Defendant on 27 March 2024 (including costs of the hearing before the Master on 26 August 2024), with certificate for counsel, summarily assessed at HK$190,000; and

(2)  The Plaintiff do forthwith and in any event pay the Defendant the costs of the appeal (including costs of the appeal hearing on 17 December 2024), with certificate for counsel, summarily assessed at HK$100,000.

65.Lastly, I thank both counsel for their assistance.

Ms Lydia Leung, instructed by Darin Leung & Partners, for the Plaintiff

Mr. Joseph Wong, instructed by Li, Kwok & Law, Solicitors & Notaries, for the Defendant