Gobind Mohan and Another v. Brian Shane Mcelney and Others

HCA004611E/1978

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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BETWEEN

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Coram: The Hon. Mr. Justice Hunter

Dates of Hearing: 1 - 5, 8 - 12 & 15 October 1984

Date of Delivery of Judgment: 15 October 1984

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JUDGMENT

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1. I have now two applications before me in this matter. The first is by the plaintiffs for leave to amend the damages formulation in paragraph 42 of the Statement of Claim. That is opposed by the surviving defendants, who retaliate by saying that I should disallow this application and dismiss the action as against them.

2. There are three parts to the amendment. The third part arises on the claim by the 2nd plaintiff. It is conceded that this amendment is unsupported by the earlier part of the pleading and it is not pursued, with the result that as against the defendants, the 2nd plaintiff's claim must be dismissed.

3. The other two matters have rather more substance. I am going to take first the application to amend what is an unnumbered part of the particulars under this paragraph, which deals with the Herald Luxim Contract. One of the main heads of negligence pleaded against these defendants is that they urged the 1st plaintiff to enter into the Herald Luxim Agreement, when they ought to have advised him against it because the 1st plaintiff could only suffer detriment from it.

4. Now there were three parts to the Herald Luxim transaction which all to be found in the first heads of agreement dated the 17th February. They were aplit off into three separate agreements later. The three parts were first: An agreement by MPIL to purchase the building from the Herald Luxim Company at a price of $4 million in cash and $2½ million shares in MPIL to be issued and allotted at par. The second part was the buy-back agreement by the plaintiff under which he undertook on certain terms to buy back these shares from the Herald Luxim Company at a price of $2.60. It is upon that agreement that the plaintiffs have focussed in this case. The third part was a rental guarantee given by Mr. Bloch.

5. Now what has been urged strenuously upon me by Mr. Eddis in that respect is that I should look for this purpose only at the buyback agreement. He says that if you look at that buy-back agreement you would see that this could only produce pain and grief to the 1st plaintiff, and there was no possibility of profit at all.

6. Now that is an observation which seems to me could always be made about a guarantee. Indeed a guarantee is almost by definition a unilateral obligation, and the person who gives the guarantee is not looking for or expecting a profit from the guarantee itself, but from the underlying transaction to which the guarantee relates. With the greatest respect to Mr. Eddis it seems to be totally impossible to separate this from the rest of the transaction, or as it were, to sever the heads of agreement themselves. It is perfectly obvious that at the time, this agreement was entered into in the. hope and expectation of profit to Mr. Mohan, a profit to be derived from the proposed floatation of MPIL. The proposed floatation was then expected to start at or about a price of $2.60, which compared very favourably indeed with the $1 or par which Mr. Mohan had paid or was about to pay for a considerable parcel of shares. What went wrong was that the market collapsed. Although everything looked set fair on the 17th February, by the time the issue actually came to be made, it was launched on a collapsed market and failed.

7. So much of the discussion over the last two days had illustrated the great problem of trying to formulate a claim against professionals for the consequences of a market collapse for which they were in no way responsible.

8. Now as far as this particular application is concerned, what Mr. Scott says in opposition to it goes like this. The cause of action here accrued on 17th February, when these contracts were entered into, upon the assumptions of negligence which he makes for the purposes of this submission. He relies primarily upon the decision of the Court of Appeal in. England in Forster v. Outred (1982) 1 W.L.R. 86 for the proposition that the entering into of an agreement like this, is the date at which a cause of action of this nature in negligence accrues. But he also acknowledges, as was pointed out both by Stephenson L.J. in that case at p.98, and more specifically by Dunn L.J. at p.100; that although the damages have to be assessed as at 17th February, for certain purposes in the actual assessment of quantum one can go forward and look at future events. The obvious future event for this purpose is the 17th July, which was the date upon which the bank as assignees from the original Luxim Company, called upon the plaintiff to perform his obligations under this contract and to re-purchase two and a half million shares at $2.60 a share.

9. In essence his submission is this. The assessment here has to be a valuation assessment as at 17th February. What the court has to do is to compare two things. First it has to make a valuation of the risk of the 1st plaintiff being called upon under this buy-back agreement to pay a sum in respect of these shares which turned out to be more than the then market price. Then it has to compare that with another value which is the total of two things; first any immediate benefit which he derived from the making of the contract; and secondly the benefit of the chance of profit which it was intended to bring about. He submits that under the first head, one can go forward to the 17th July and see what the market value of the shares would then have been immediately after the bank's call upon the plaintiff. I need not pause to consider whether the relevant price for this purpose is the buying or the selling price. That he says involves evidence of market at that date because this was quite a substantial proportion, over 5%, I think, of the company's capital, and you cannot simply take the then list price on the Hong Kong Stock Exchange and apply it willy-nilly to this particular parcel without further inquiry.

10. Secondly and more substantially, he says, that you have also got to take into account the other half of the equation; and that is the immediate benefit and the chance of profit. As far as the immediate benefit is concerned, he points to two immediate benefits; derived directly and indirectly from shareholdings in MPIL, both by the plaintiffs and by Mohan's Limited. This was because under these Herald Luxim Agreements, MPIL was acquiring a property said to be worth $8 million for a total consideration of $6½ million. This profit, it intended to capitalise, and then immediately after, did so, to the direct benefit of the plaintiff in his shareholding, where his increased shareholding derived from that capitalization; and to this indirect benefit from the new shares then issued to Mohan's Limited. That he says, is another crucial element in this assessment.

11. In summary what he submitted about the new formulation under this paragraph goes like this. First of all it is wrong as it stands. Secondly it constitutes new fact. He submits that the paragraph as it stood was totally useless, and indeed this is acknowledged by the fact that the whole thing is being struck out. Therefore anything which is added to it is new. Damages are an essential feature of the cause of action in negligence. This therefore constitutes part of a new cause of action in negligence, because it asserts new material facts which have to be proved in support of that cause of action. On that basis he seeks to bring himself within the familiar principle that I have dealt with so many times in this case, that this amendment should be disallowed as raising a new cause of action after the expiry of the limitation period. Thirdly and alternatively he says, this is much too late. To allow the plaintiffs to advance a new case for the first time at this stage, is going to prejudice the defendants, in having to meet it at this stage, and in trying to get back, for example, to market evidence as to the value of MPIL shares in 1973.

12. Mr. Eddis seeks to deal with those objections initially and basically in this way. He said, first of all, that the amendment as formulated was right, and indeed it was the only basis upon which the matter could be put forward. In other words the only basis upon which damages could be assessed here in respect of these shares, was by the comparison between the price at which the plaintiff was required on 17th July 1973 by the bank to buy them i.e. $2.60; and their actual realisation price fo 30¢ a share which must have occurred either in September 1977 or January 1978. He insisted that this was the only basis upon   which damages could be assessed and for some time was refusing to advance any other basis.

13. My first observation upon that is that it seems to me plain as a matter of law that that basis is wrong. The matter is to my mind made crystal clear by the authorities that were put before me this morning, which were in fact conveniently summarised by the Court of Appeal in England in Perry v. Sydney Phillips (1982) 3 A.E.R. 705. Each member of the Court of Appeal made it clear that in this type of case the basic measure of damages is a comparable valuation measure as at the date of the breach. I need only read what Lord Denning M.R. said at page 708 G:  "The general rule of law is that you assess tab damages at the date of the breach". He goes on to say, "you have to take the difference in valuation". That is said in that case, to be derived from a trilogy of cases, two of which concern surveyors and one of which concerns solicitors. I cannot see any possible escape from that conclusion. Nor can I see how an actual realisation price some four or five years later can be remotely relevant, except in so far as it might reflect upon value at the material time which cannot go beyond July/August 1973. The-suggestion that this was dictated by the terms of the mortgage between the plaintiff and the bank is (a) irrelevant in law and (b) not made out on the facts. So the present formulation in the document in front of me is, in my judgment, plainly wrong.

14. At a very late stage, and after some considerable pressure and prompting from the court, Mr. Eddis advanced an alternative formula which is that the comparison is between the price of $2.60, and the mean market price on 16th July 1973 say, 80¢. Now this in my judgment gets very much closer to the correct basis in law.

15. Mr. Eddis seems to me to have two insuperable problems arising from the date at which this amendment is being put forward. The first is, that it is perfectly obvious that to consider the true value of those shares as at the 16th July, one would have, as Mr. Scott submits, to consider the impact on the list price of a parcel of this size. This means trying now to get evidence of market, of events of some 11 years ago. Secondly as Mr. Scott points out, this is only half the valuation problem anyhow. I think he is right when he submits that you have to bring in the whole valuation approach. Indeed I accept his argument upon this matter in its entirety. This amendment simply does not touch the other aspects of value to this plaintiff, which he was expecting to derive, or in fact derived from this Herald Luxim Contract. The result is that this is on any view new fact. I think that it probably falls within the new cause of action definition which I have already referred to repeatedly. But whether it does or not, it is equally obvious that no court can now properly grant leave to the plaintiff to re-open and rejig his case to this extent years after the event.

16. So I go back to the first amendment which is sought under paragraphs (c) and (d) of this paragraph, with the preliminary observation that it-is common ground that (d) is derivative of (c) and dependent upon it. The first observation there is that, as drawn, the original red version here is meaningless. It was not a damages computation at all. It was simply a claim for repayment of the cost of loans. Now the amendment advanced in (c) is an attempt to deal with this by converting it into a damages formulation - a profit and loss, or a plus and minus formulation, I do not mind how it is put - by giving credit for the repayments under the loan. But the repayments figure that it is given turns out to be simply a balancing figure. Mr. Eddis confessed that he has no idea how this figure is made up. He simply did an arithmetical sum from two existing figuren in the particulars namely $15.972 million and $2.185404 million and arrived at his balance. It seems to me quite impossible to invite a party at this juncture to accept a balancing figure like that, without further information, and simply upon the assurance of counsel that it is generous. It is perfectly obvious that this figure would have to be investigated with considerable detail. Therefore that approach cannot be right.

17. Secondly this particular formulation suffers from the same malaise as the original formulation under the earlier paragraph I dealt with, because this again does not purport to be based upon value. It is apparently based upon actual realisation over some considerable period of time. So those observations alone, would I suspect be fatal.

18. But there is a much more. fundamental objection to this type of formulation. A man in my judgment does not lose money by taking a loan. If he suffers some loss, that loss arises from the use he thereafter makes of the money he borrows. A profit or loss calculation has to look to that conduct not simply to the loan. itself. You have to ask yourself what was the money applied to and for, and what was the result of that investment, was it a plus or a minus. That is simply not attempted to be done under this paragraph.

19. It can be very simply tested, because the first item in the list of loans is a loan of $2.3 million. This relates to a house in Creasey Road. This was owned by MPIL, and was a house in which the plaintiff lived rent free for some considerable time. I have been told that he was advised, that MPIL could not possibly go public with one of its directors living rent free in one of its assets. Something had to be done about it. The only thing that could be done was for him to buy the property from the company. I pause there to notice, that the motivation for the purchase was the decision to go public, and had no connection whatever with any professional advice. The result was that the plaintiff borrowed $2.3 million and purchased the property for that sum.

20. One asks oneself therefore what loss did he suffer from that transaction? The answer seems to be nothing. There is no suggestion that he paid over the odds for that property. He then continues to live there. I am told, in the particulars, that the property was sold in January 1976 for $2.7 million. But what apparently I have got in this amended claim is this. A claim for the recovery of the loan itself at $2.3 million: a claim for the recovery of the interest paid on that loan; a possibility that the capital repayment on the property has been included in the repayments; but nothing included at all in respect of the use and occupation of the property. Mr. Scott described this plea as "just silly", I can only agree with him.

21. The second item in this list is bridging overdraft of $8.172 million. I was told that this was made up of two figures. The first is the $4 million which he borrowed, and then used to buy 4 million shares from MPIL; that company then passed the cash on to Herald Luxim in respect of the purchas I have just referred to. The second one was a similar transaction where there was a borrowing of $4.72 million, the purchase of shares to the same figure at par, and the use by MPIL of that sum to buy another property. Now there may be doubt as to whether those facts are well founded. But that, I was told is the hypothesis behind this plea. Again one only has to state those facts, to see that a loss under this transaction can only arise by comparing the price at which he bought the shares, with the market price of the shares at that time. He bought these shares at par, or perhaps I should say, they were issued and allotted to him at par. A damages computation would have to start with the assertion that those shares were then worth less than par. In the market conditions prevailing at this time that seems to me to be almost impossible. The shares only collapsed in value after the collapse of the market. This again underlines the basic problem which runs through all this, of trying to bring home to negligent solicitors losses caused by a market collapse.

22. The third item in this is a loan of $5.5 million, which again is claimed in specie. Mr. Scott's phraseology also applies to this. If it is right, it would-assume that the total buy-back cost of the $2½ million shares in MPIL was not 6½ but 6½ plus 5½ i.e. $12 million which is, as he said, just silly. So that if one looks at those-three items individually one can see that there is simply no substance in them at a11.

23. Finally for my part I cannot see any sufficient nexus between the negligence pleaded and this damage. The negligence pleaded has been very conveniently summarised in what has been called the 4th edition of the summary of the complaints. One looks here at the failures to warn, particularly those enumerated under paragraphs 1(b), 2 and 3. All these go to a complaint of negligence in failing to give advice that the floatation should be stopped.

24. The pleading asserts that "sufficient advice" would have been that the floatation could be reversed. For reasons that I have already given, that plainly is not so. Sufficient advice had to have included a warning about the risk of litigation arising out of the Herald Luxim contract. If one assumes that that difficulty can be overcome, a damages computation under this head seems to me necessarily to entail two things. First of all, you have to consider the date at which the warning was given, and do a prospective or a hypothetical analysis of what the plaintiff's position would then have been, had the warning been given and acted upon, and the floatation stopped at some date before the launch; and then compare this position with the actual position following the floatation. That is the only way that I can see that you can formulate damages under this head. The formulation must be very very close to the impossible. It would be very difficult to do on the figures alone. But having done it on the figures alone, one would then have to bring in some estimate of the risk of Mr. Bloch suing under the Herald Luxim contracts, which seems to me to create a totally impossible situation.

25. The other failure relied upon is paragraph 1(a). This is a failure to enquire what assets the plaintiff had available to use personally, if the floation fail to reach its intended objective, namely a price of more than $3 a share. I can see arguments for saying that that would bite on the buy-back agreement under Herald Luxim. With the best will in the world I can see no way in which that could bite upon the purchase of the house, which is the subject matter of the first loan, or the purchase of any of the shares under the second.

26. Therefore in respect of this paragraph it seems to me that there is no substance in these claims at all; and that if there was, the dual objections of limitation and discretion would apply equally.

27. All this seems to me to underline the near impossible task a person faces in a damages formulation when he tries to attribute losses which are fundamentally occasioned by a collapse of the market (or bad luck if you like) to professional negligence. There have been three attempts so far in this case. The black one in the original Statement of Claim failed, because it had no foundation in law. The second one likewise failed, that is the red one, because that had no foundation in law. The third one, the purple one, is that which I have just dealt with. All I can say about it is this, I am not surprised that these matters have occasionally great difficulty to a successive pleaders because they have faced a very difficult task indeed.

28. Before simply dismissing the claim, which necessarily follows from my conclusion, I feel it necessary to add one further comment on liability. This is a matter which I have not reached. I am simply expressing certain tentative views upon it, really for the benefit of Mr. Obi Mohan who unfortunately has not been able to attend to court today.

29. This case was opened to me upon the basis that the negligence was founded upon two principal assertions. The second of those assertions was the failure to stop the floatation. For reasons which I have already pointed out, that seems to me to be as near a hopeless assertion as you can get. The second related to the Herald Luxim contract. There are two points which arose particularly in relation to that.

30. The first is that I have seen a number of documents. I have seen a number of bills rendered by these solicitors to their apparent clients. All those documents and all those bills proceed upon the basis that they were retained by and performing professional services for, one or other of Mr. Mohan's companies. But the contention is that from the outset in 1970 the solicitors accepted a retainer from Mr. Mohan personally and from his father personally because Mr. Mohan regarded Mr. McElney as his solicitor. That contention was not originally advanced by counsel at all when he referred me to the documents. In fact he disclaimed it. It is only after I drew his attention to the difficulty of reconciling that disclaimer with his pleadings, that he put it in the way in which he was eventually forced to put it. I need only say that it would be an exceedingly difficult contention to establish.

31. The second problem arising under the Herald Luxim contract is this. Once one rejects Mr. Eddis isolation argument as I have already done, the Herald Luxim deal was a very simple exercise in financing. Its profitability was obviously and admittedly going to depend upon the success of the floatation. In the heady state of the market on 17th February the prospects looked good. A good floatation would inevitably lead to a good profit. That was the confident expectation. Objectively speaking the converse situation was equally obvious but unexpected. A bad floatation could necessarily lead to a repurchase of these shares at more on the market price then ruling. The market collapsed, through nobody's fault, and that was the actual result. I venture to doubt whether Mr. Obi Mohan has ever really faced up to the fact that to start to maintain this claim, and to maintain the need for the advice that he asserts, he has to claim that despite his experience in the market he did not understand a transparently obvious risk; a risk I am minded to think that would have been so regarded by a first year economics student. In the events that have happened he has not been required to give evidence. But if he had gone into the witness box, I venture to doubt whether he could have brought himself to assert a degree of ignorance of this nature. I also feel constrained to add that if he had asserted it, I very much doubt if I could have regarded such assertion as credible.

32. My decision on this application is based upon the damages claims advanced, I have added those observations because if there is anything in them or if there is any prospect of their being well founded, the conclusion is inescapable that this action, from its outset, was ill advised and mis-conceived. My ruling upon this matter is that leave to amend is refused and that the actions stand dismissed against both the surviving defendants.

Representation:

Mr. Francis Eddis instructed by M/s Haldane Midgley & Co. for Plaintiffs.

Mr. Peter Scott, Q.C., Mr. D.A.L. Wright and Mr. Andrew Li instructed by M/s Lo & Lo for 1st and  2nd Defendants.

Mr. Alexander Irvine, Q.C. and Mr. Anthony Dicks instructed by Baker & McKenzie for 4th Defendant.