Mobil Oil Hong Kong Ltd v. or Wing Ching and Others

HCMP 5041/2001

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 5041 OF 2001

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BETWEEN

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Before: Hon A Cheung J in Court

Dates of Hearing: 18-21, 25-29 October and 1-5, 22-25 November 2004

Date of Judgment: 10 March 2005

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J U D G M E N T

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The Plaintiff’s claim

1.In this action, the Plaintiff sues to recover various sums of money, damages and interest against the Defendants, as well as vacant possession of three mortgaged properties.  Various relief is counterclaimed by the 1^st, 2^nd and 3^rd Defendants. (The 4^th Defendant, unrepresented, was absent at trial.)

2.At all material times, the Plaintiff was part of the group of companies under Mobil Corporation, USA, which merged with Exxon Corporation, USA, in December 1999.  After the merger, the Plaintiff, a local company, has remained a separate legal entity in Hong Kong.  On 7 February 2003, the Plaintiff passed a special resolution for members voluntary winding up in accordance with section 233 of the Companies Ordinance (Cap. 32). 

3.The Plaintiff was at all material times in the business as supplier of petroleum products, such as LP gas, petrol, diesel etc. in various areas, including Hong Kong, Macau and the Mainland.

4.The 1^st Defendant was at all material times in the business as dealer of the Plaintiff’s LP gas products in Hong Kong.

5.The 2^nd Defendant is his wife.  The two Defendants are and were respectively the registered owners of two residential properties in Shatin and Tsing Yi (respectively the “1^st property” and “2^nd property” – I am using abbreviations in this judgment that are different from that used by the parties in the pleadings and at trial).

6.The 3^rd Defendant was and is at all material times the registered owner of 50% of the issued shares of the 4^th Defendant, which is and was the registered owner of another property in Shatin (the “3^rd property”).  For all practical purposes, the 4^th Defendant is and was “her company”.

7.Shenzhen City Lin Gang Petroleum Industry Company Limited (“Lin Gang”) is and was at all material times a Mainland company.  In 1995, Lin Gang was granted land use rights by the Shenzhen City Government over 2 pieces of land situated respectively in Fumin Road and Bei Huan Road, Shenzhen, with permission to construct and operate petrol filling stations on the land.

8.It is common ground that Lin Gang did not have sufficient capital to pay the balance land premiums to the City Government or the costs of construction of the petrol stations.  It therefore approached various foreign petroleum companies, including the Plaintiff, for possible funding and cooperation.

9.There is no dispute that the Plaintiff was seriously interested in the approach.  The matter was basically handled by the China Retail Department of the Plaintiff, headed by Peggy Wu.  She was assisted by Linda Chan who worked under her, and her subordinate, Chester Chan.  In turn, Peggy Wu reported to Chris Keong who reported directly to the Managing Director of the Plaintiff, George Good.  Also closely involved was the Legal Department of the Plaintiff.

10.According to Peggy Wu’s evidence, the Plaintiff had known since 1994 that according to the then applicable Mainland law and regulations, no direct investment by a foreign entity in the construction or running of petrol filling stations in the Mainland would be approved.  Thus when the Plaintiff was approached by Lin Gang in 1996, the Plaintiff, which was very much interested in developing a market presence and influence in the Mainland, initially thought of investing in the stations through one of its two foreign-invested enterprises (“FIEs”) that had already been established in the Mainland, which would form a joint venture with Lin Gang to develop and operate the petrol filling stations for 30 years.

11.Legal advices were sought, but by September 1996, it was clear to the Plaintiff that Mainland law and regulations prohibited not only a direct foreign investment or a subcontracting arrangement (“chengbao” – “承包”) with Lin Gang which had the licence to construct and operate the filling stations, but also a joint venture arrangement between Lin Gang and one of the Plaintiff’s FIEs would also be prohibited.

12.According to the evidence adduced by the Plaintiff, having obtained such legal advices, the Plaintiff thought of giving up the potential investment.  That remained the position until sometime in October when a proposal was put forward by the in-house counsel of the Plaintiff that the business opportunity could be channelled to an entity which was able and willing to take up the opportunity in its own name, i.e. a Mainland entity – the Mainland law and regulations in question would not prohibit the participation by such an entity in the development or operation of the petrol stations.  The idea was that such an entity would enter into all necessary contracts with Lin Gang in the Mainland, including the advance of the necessary money to Lin Gang for the payment of the land premiums and the construction costs of the two stations, which would be secured by the deposit of Lin Gang’s land use licence with the Mainland entity.  The Plaintiff’s profit would be derived from a service mark licence contract (“SML Contract”) and dealer licence agreements (“DLAs”) to be entered into between the Plaintiff, Lin Gang and the Mainland entity.  The stations would be run under the trade name of “Mobil” and sell products supplied by the Plaintiff.  A loan would be granted by the Plaintiff to the Mainland entity to take up the business opportunity, which would be secured by securities to be given by the entity to the Plaintiff.  It was hoped that if and when the Mainland should relax its policy towards foreign participation, investment and operation of petrol filling stations in future, the Mainland entity would be agreeable to transfer its interest in the petrol filling stations to the Plaintiff, in which event the Plaintiff could directly invest in the filling stations via a joint venture (through one of its FIEs). 

13.Pausing here, it should be added by way of background (and contrast) that for petrol stations in Hong Kong, according to the evidence, they were owned and developed directly by the Plaintiff itself.  However, the Plaintiff did not run these stations.  It appointed dealers to do so, who would be required to pay rent and utilities charges to the Plaintiff.  The Plaintiff would enter into DLAs with these dealers who would be authorised to sell the products supplied by the Plaintiff and run the filling stations under the trade name of “Mobil”. 

14.The dealers, though conducting their businesses independently, would be required to comply with certain conditions and guidelines laid down by the Plaintiff, including the layouts of their stations and outfits of the workers, and the numbers of staff required to be on duty at the stations.  Furthermore, in order to assist a dealer to set up his business and to provide incentive for the dealer to promote the sale of the Plaintiff’s products, the Plaintiff had a lending scheme for its dealers known as “Investment and Advancement Loan” (“I/A loan”).  Interest was chargeable under the I/A loan.  The loan was granted to the dealer for a specific purpose, mainly for assisting him to set up a business and the dealer was required to achieve a threshold sales volume of Mobil’s products as a term of the loan.  Upon achieving the sales target, the dealer would be given a credit or subsidy which could be applied to settle its instalment repayments of the I/A loan. 

15.The Plaintiff however retained the absolute right to demand repayment of the outstanding balance of the loan at any time.  This might happen if, for instance, the purpose for which the loan was granted had not been attained or the committed threshold sales volume had not been achieved by the dealer within the period fixed by the Plaintiff.

16.So much for the position in Hong Kong.  Returning to the idea developed by the in-house counsel of the Plaintiff, that idea differed from a typical arrangement for a Hong Kong filling station in that firstly, the filling station would not be owned or constructed, whether wholly or partially, by Mobil as such; Mainland law and regulations would not permit that.  Rather, it would be owned and constructed via the cooperation between Lin Gang and the Mainland entity.  Secondly, whilst an I/A loan would be advanced, the purpose of the loan under the in-house counsel’s proposal would be to enable the Mainland entity and thus ultimately Lin Gang to pay the outstanding land premiums and construction costs of the petrol stations, rather than for the setting up of the dealer’s business or meeting of other operational needs of the dealer.  Thirdly and perhaps most importantly, whilst the Mainland entity would also play the role of a dealer in the sense that under the proposal, it would be responsible for the running of the filling stations, and relevant DLAs would be signed, there would be no provisions in the DLAs providing for giving of credits or subsidies which could be applied to settle repayment of the I/A loan.  According to the Plaintiff’s case and the evidence adduced by it, particularly the evidence of Peggy Wu and Chester Chan, the I/A loan would remain repayable at all times at the discretion of the Plaintiff. 

17.The 1^st and 2^nd Defendants came into the picture because, to cut a long story short, they were chosen by the Plaintiff to be the dealer/Mainland entity in question.  To explain, the 1^st Defendant has a cousin, a Mainland citizen, by the name of Qiu Wen Long (“Qiu”), who owned a Mainland company, Shenzhen Po On Easy Trading Company Limited (“Po On Easy”).  According to the representations made by the 1^st Defendant to the Plaintiff (so the Plaintiff’s witnesses said), Qiu held Po On Easy as nominee for the 1^st Defendant, who had or was in a position to obtain full control of Po On Easy.  In the eyes of the Plaintiff, Po On Easy and Qiu were equivalent to the 1^st Defendant (and the 2^nd Defendant – the couple was treated as one and the same by the Plaintiff).  As Peggy Wu explained in evidence, the 1^st Defendant/Po On Easy/Qiu were chosen by the Plaintiff because the Plaintiff had trust and confidence in the 1^st Defendant as an established dealer of the Plaintiff in LP products in Hong Kong (whose family was also in the same business in Hong Kong and Macau), the 1^st Defendant could provide Po On Easy as the Mainland entity to deal with Lin Gang directly and most importantly, the 1^st Defendant was in a position to provide the required securities for the respective loans relating to the two stations to be advanced under the proposal.

18.After negotiations between the various parties and lawyers, eventually the project was approved by the top management of the Plaintiff on 25 November 1996, and over a period of time various documents were prepared and signed to implement the proposal (as subsequently developed).  Thus two facilities letters dated 29 October 1996 and 16 December 1996 were issued by the Plaintiff to the 1^st and 2^nd Defendants whereby credit facilities of up to HK$20,527,000.00 in total were granted to the two Defendants jointly and severally “for the sole purpose of financing the borrowers’ business” – the development of the two petrol filling stations.  The facilities letters expressly stipulated that the facilities were repayable on demand (clause 5).  As securities for the facilities, the 1^st and 2^nd properties were mortgaged by the two Defendants respectively in favour of the Plaintiff on 22 November 1996.  Monies were eventually drawn down under the two facilities letters on 25 November 1996 and 18 December 1996.  There is no dispute that the monies so drawn down were expended on or in connection with the development of the two petrol filling stations.

19.Apart from the facilities letters and mortgages, the Plaintiff and the 1^st Defendant executed two DLAs respectively dated 1 May 1997 and 1July 1997 in respect of the Fumin filling station and Bei Huan filling station.  Under the DLAs, the 1^st Defendant agreed to pay to the Plaintiff a monthly licence fee in respect of each station calculated on the basis of the total amount of motor gasoline and automotive diesel oil sold at the station, and the percentage of the retail price.  On the other hand, the Plaintiff agreed under each of the two DLAs to pay the 1^st Defendant commission in respect of the station in the amount set out in a schedule (schedule 7) to enable the 1^st Defendant to pay Lin Gang expenses associated with the operation of the station.  Payment of the commission was subject to the 1^st Defendant’s due and timeous performance of his obligations under the DLAs.  Such commission was repayable by the 1^st Defendant upon termination of the DLAs. 

20.Under the DLAs, one of the 1^st Defendant’s obligations was to procure Lin Gang to pay timeously all amounts due to the Plaintiff, including the licence fees for the use of the service marks under the SML Contract entered into between the Plaintiff and Lin Gang (see below).  Further, the 1^st Defendant agreed to indemnify the Plaintiff against all losses arising out of or in connection with his failure to perform the terms of the DLAs as well as the breaches by Lin Gang of the terms of the SML Contract and the Equipment Loan to Trade Contracts between the Plaintiff and Lin Gang (see below).

21.As mentioned above, amongst the documents executed pursuant to the scheme of the Plaintiff was a SML Contract dated 24 January 1997 between the Plaintiff and Lin Gang whereby the Plaintiff granted to Lin Gang a non-exclusive licence in respect of the use of Mobil Inc.’s service marks at the two petrol filling stations.  Under the SML Contract, Lin Gang agreed to pay Mobil Inc. a monthly licence fee (which was assigned to the Plaintiff) calculated on the basis of a percentage of the volume of the motor gasoline and automotive diesel oil sold at the two stations as multiplied by their prices. 

22.Apart from the SML Contract, the Plaintiff and Lin Gang also signed two Equipment Loan to Trade Contracts dated 24 January 1997 (“ELT contracts”), whereby the Plaintiff agreed to provide and assist in the installation of equipment for use at the two stations.  The contracts provided that upon termination, Lin Gang would, at the option of the Plaintiff, purchase the equipment from the Plaintiff at the book value of the equipment on an “as is” basis, which value would be calculated by the Plaintiff and be deemed conclusive.  The equipment was to be installed at the two stations at the budgeted cost of RMB¥5 million, which, unlike the I/A loans made to the 1^st and 2^nd Defendants, was regarded in the books of the Plaintiff as additions to fixed assets (i.e. capital appropriation).

23.The combined value of the mortgaged properties, according to their then market prices, was about 60% of the amount to be advanced under the facilities letters.  The Plaintiff’s witnesses said that originally the Plaintiff had asked for an 80% security, but as the 1^st and 2^nd Defendants could only offer the securities in question, the Plaintiff eventually agreed to lower the requirement to 60%.

24.To complete the description of the principal documentation, there were three other signed documents also dated 24 January 1997 – a Loan Contract, a Services Management Contract and a Joint Venture First Option Confirmatory Contract.  The Loan Contract for RMB¥22 million was signed between Qiu and Lin Gang, whereby Qiu agreed to advance RMB¥22 million to Lin Gang for the development of the two stations.  Pausing here, it should be explained that as the idea of the Plaintiff developed, it became apparent (following advice from Mainland lawyers – King & Wood) that it would be most convenient to use an individual, instead of a legal entity in the Mainland, to advance the necessary money to Lin Gang to enable Lin Gang to pay the outstanding land premiums and construct the two filling stations.  Thus the Loan Contract was made with Qiu, with RMB¥14 million directly paid by Qiu to the Shenzhen City Government in payment of the outstanding land premiums and the remaining RMB¥8 million paid by Po On Easy (who entered into the Loan Contract as guarantor) for the construction of the two petrol filling stations.  Qiu also agreed under the Loan Contract, subject to the consent of Po On Easy, to waive the repayment of the loan.

25.Under the Services Management Contract which was signed between Po On Easy and Lin Gang, Po On Easy acquired the right to run and manage the two petrol filling stations for a period lasting until 31 December 2026, pending the formation of a joint venture between the two to take over the ownership and operation of the two petrol filling stations.  Under the Services Management Contract, Po On Easy also obtained the sole right and responsibility regarding the design and construction of the petrol filling stations.

26.Under the Joint Venture First Option Confirmatory Contract dated 24 January 1997 between Po On Easy and Lin Gang, the two agreed that during the period of validity of the Services Management Contract, if and when the law of the Mainland should permit, the two sides would form a joint venture company to take over the two petrol filling stations and their operation.  Significantly, under the contract, Po On Easy could nominate a third party to form the joint venture company with Lin Gang.  The term of the joint venture was to expire on 31 December 2026. 

27.Under the Services Management Contract and First Option Confirmatory Contract, whether before or after the establishment of the joint venture, Po On Easy had to pay Lin Gang an annual fee as set out in the two contracts (RMB¥1 million per year for Bei Huan and RMB¥1.2 million per year for Fumin), in consideration of the rights acquired by Po On Easy under the same.  It should be noted that as regards these fees payable by Po On Easy to Lin Gang, both in terms of amounts and in terms of time of payment, they were exactly the same as the monies payable by the Plaintiff to the 1^st Defendant by way of schedule 7 commissions set out in the two DLAs between the Plaintiff and the 1^st Defendant.

28.Another important point to note at this stage is that according to the Plaintiff’s case and in particular the evidence of Peggy Wu, whilst Po On Easy had acquired from Lin Gang, by virtue of the relevant documents described above, a right to form a joint venture company with Lin Gang for the running of the two petrol stations up to 2026, provided that the same should be allowed by future changes (if any) to the law and regulations of the Mainland, and the right to nominate a third party to form the joint venture with Lin Gang, there was no contractual promise on the part of Po On Easy/Qiu/the 1^st Defendant to nominate the Plaintiff to be the joint venture partner with Lin Gang – the initial and indeed ultimate aim of the Plaintiff in the whole matter.  In the words of Peggy Wu, the Plaintiff was merely buying a “hope” or “dream” in the whole matter under the entire documentation and arrangement.  She explained in evidence that a balance had to be struck so that a “win-win situation” could be arrived at under which there would be sufficient incentive left to the dealer (i.e. the 1^st Defendant) to enter into the arrangement in the first place.  In other words, if the 1^st Defendant should have no choice under the arrangement but to nominate the Plaintiff to become the joint venture partner with Lin Gang, there would be no or insufficient incentive or attraction to the 1^st Defendant to enter into the arrangement in the first place.  It was only when the 1^st Defendant had the choice, despite the legitimate expectation and hope of the Plaintiff, to enter into the joint venture with Lin Gang by itself or to nominate (for a sufficiently attractive consideration) another interested investor to do so – if the business of the two petrol filling stations should turn out to be successful and profitable, that the whole deal would be, from the angle of the 1^st Defendant, sufficiently attractive to him to enter into, who had to provide various securities to the Plaintiff to secure the I/A loans.  According to Peggy Wu, a balance was struck at the level of a “hope”, without any legal commitment on the part of the 1^st Defendant/Po On Easy.  This formed one of the main explanations and reasons given by the Plaintiff in denying that the whole transaction constituted, in reality, an “investment” by the Plaintiff in the two petrol stations (via the backdoor).  I will return to the arguments raised by the 1^st and 2^nd Defendants in due course.  

29.But at this stage it suffices to say that according to the Plaintiff’s case and in particular the evidence of Peggy Wu, although the prohibition against direct investment under the then applicable Mainland law and regulations provided the background or even the explanation for the actual transactions that were eventually entered into by all parties concerned, the transactions themselves were genuine commercial transactions.  In particular, Peggy Wu denied that under those transactions, whether viewed individually or in a composite manner, the 1^st and 2^nd Defendants were mere pawns in the scheme of things engineered by the Plaintiff to get round the legal prohibition under Mainland law and regulations relating to foreign “investment” or participation in petrol filling stations in the Mainland.  Peggy Wu maintained in evidence that the I/A loans advanced under the facilities letters to the 1^st and 2^nd Defendants were repayable at the discretion of the Plaintiff.  There was never any promise or even understanding amongst the parties that the loans would be “non-repayable”.

30.Barry Li, the Plaintiff’s manager in charge of retail/wholesale fuels in 1997, said in evidence that the 1^st Defendant had independent legal advice (in the form of assistance from a lawyer friend) at the drafting and negotiation stage of the DLAs.  Concessions in terms of a 6-month business review and suspension of 6 months licence fees were extracted from the Plaintiff.  Further, because of the 1^st Defendant’s concern regarding his and his wife’s liability under the DLAs and facilities letters, amongst other things, the Plaintiff issued a “comfort letter” dated 30 May 1997 to the 1^st and 2^nd Defendants, which was accompanied by a Chinese translation.  After the receipt of the comfort letter, the 1^st Defendant duly signed the DLA for the Fumin station on 30 May 1997 (which was back-dated to 1 May 1997).  The comfort letter, signed by Peggy Wu on behalf of the Plaintiff and by the 1^st Defendant on behalf of himself and his wife, was in the following terms:

“May 30, 1997
Mr. Or Wing Ching
Ms. Ngan Chor Ying, Ann
Present
Dear Mr. Or,
”Re:  Facility Letters dated October 29, 1996 and December 16, 1996 (the “loans”)
We refer to our recent discussions regarding the repayment of the Loans and write to advise that on condition that Mr. Or Wing Ching has duly and diligently performed all his obligations under the Dealership Agreement dated May 1, 1997 between himself and our Company (the “Agreement”), we will give favourable consideration, at our sole discretion, to discharging certain Security (as defined in the Loans) during the currency of the Agreement and/or forgiving the amounts due and owing under the Loans after the expiry of the Agreement on December 31, 2026.  For the avoidance of doubt, it is expressly acknowledged by you that this letter shows our good faith intention to maintain our mutual benefits in this matter but does not constitute a legally binding obligation on us to so discharging the Security or forgiving the amounts due and owing under the Loans.
Yours sincerely,
For and on behalf of
Mobil Oil Hong Kong Limited
[sd.]		Agreed to by:
(Peggy Wu)		[sd.]
		(The 1st Defendant)
		______________________________
[Chop of the Plaintiff]		Or Wing Ching and Ngan Chor Ying,
		Ann
		May 30, 1997”

31.This, according to the Plaintiff’s case and its witnesses’ evidence, constituted the bottom line of the Plaintiff regarding the need for repayment of the loans advanced under the facilities letters.  It is fair to say that according to the Plaintiff’s case, the position under the comfort letter represented part of the balance struck by the Plaintiff in its attempt to come up with a win-win situation under which sufficient incentive and attraction would be provided to the dealer to enter into the transactions, whilst the interest of the Plaintiff would be preserved and protected to an acceptable degree.  Put another way, whilst the Plaintiff, in the words of Peggy Wu, was buying a hope or dream in future regarding entering into a joint venture with Lin Gang, with no contractual commitment on the part of the 1^st Defendant to nominate the Plaintiff to do so, the 1^st Defendant, on the other hand, had a promise of “favourable consideration” regarding the waiver of the loans under the facilities letters, which was not backed by any contractual commitment or obligation on the part of the Plaintiff to so waive the same.  A balance was thus struck, at least according to the Plaintiff’s case. 

32.I will now move on to explain the involvement of the 3^rd and 4^th Defendants in the disputes.  The 3^rd Defendant was at all material times a director and shareholder of the 4^th Defendant, which was (and is) the registered owner of a property in New Town Plaza in Shatin (the 3^rd property).

33.Apart from the two petrol stations in Fumin Road and Bei Huan Road, Lin Gang also had a third petrol station – an existing petrol station in Song Gang, Shenzhen, which had been partly owned (40%) and operated by another entity.  In mid-1997, Lin Gang approached the Plaintiff for the transfer of the capital outlay of the petrol station to the Plaintiff and the subcontracting of the running of the station to the Plaintiff at an acquisition fee of RMB¥11 million and annual chengbao fee of RMB¥1.2 million.  The Plaintiff was interested and entered into negotiations with Lin Gang about the fees for a period of cooperation of 28 years, and the 1^st Defendant was involved by the Plaintiff, with a view that a similar arrangement to those regarding the two other stations be adopted in relation to the Song Gang station.

34.However, by then, the 1^st Defendant had no further security to offer the Plaintiff, who would again advance a loan to the 1^st Defendant/Po On Easy/Qiu for onward payment to Lin Gang.  In those circumstances, the 1^st Defendant successfully persuaded the 3^rd Defendant to join him as a partner in running the Song Gang petrol station, with the 3^rd Defendant, through her company – the 4^th Defendant, offering the latter’s property (the 3^rd property) as security for the loan.  That was how, in gist, the 3^rd and 4^th Defendants entered into the picture.

35.Eventually by a Deposit Agreement dated 15 August 1997, Po On Easy and Lin Gang entered into an agreement for taking over of the Song Gang station and its operation by Po On Easy.  A deposit of RMB¥500,000.00 was paid.  A “loan” of RMB¥9 million was agreed to be advanced by Po On Easy to Lin Gang.  The parties agreed to cooperate for a term of 28 years.  An annual fee of RMB¥1.2 million (to be increased to RMB¥1.3 million as from the 6^th year) was to be paid by Po On Easy to Lin Gang.  By a 3^rd facilities letter dated 7 October 1997, the Plaintiff provided a loan to the extent of HK$8.4 million to the 1^st and 3^rd Defendants jointly, with the 4^th Defendant providing the 3^rd property as security for the facilities.  The mortgage was dated 7 November 1997.

36.Two sums of money (HK$4.65 million and HK$3.277 million) were advanced under the 3^rd facilities letter on 28 November 1997 and 18 February 1998.  The monies went through the hands of the 1^st and 3^rd Defendants and Po On Easy/Qiu, and were eventually received by Lin Gang (as a loan which would be waived).

37.Indeed on 28 November 1997, Po On Easy/Qiu entered into a Loan Contract for RMB¥9 million, a Services Management Contract and an Option Contract with Lin Gang in relation to the Song Gang station, on terms similar to that used in respect of the other two stations.

38.However, unlike the other two stations, the parties never signed a DLA in respect of the Song Gang station, the principal reason of which was that the station was never profitable right from the beginning, and the parties simply could not agree on the amount of money payable under the DLA.

39.As for the other two filling stations (which started operation in 1997), at least initially, some profits were made.  But to cut a long story short, business turned bad as from mid-1999 when government policy in the Mainland changed, resulting in an adverse business environment for the filling stations.  In gist, it is the Plaintiff’s case that the 1^st Defendant then failed to pay the DLA licence fees and likewise Lin Gang failed to pay the SML licence fees since late 1999, thereby acting in breach of the relevant agreements.  The Plaintiff stopped paying the schedule 7 commissions under the DLAs in respect of the Fumin station and Bei Huan station, it having previously paid the 1^st Defendant commissions in the total sum of RMB¥8.5 million (whereas apart from a sum of RMB¥200,000.00 the Plaintiff had from the outset not paid any “commission” in respect of the Song Gang station as no DLA had ever been signed).  This led to Lin Gang first chasing Po On Easy and subsequently the Plaintiff directly for the outstanding chengbao fees.

40.The parties entered into settlement talks and negotiations, and a “five-party” settlement agreement was eventually reached in relation to the Song Gang station.  Amongst other things, the Plaintiff agreed to pay (by way of set-off) a sum of RMB¥1.2 million as part of the outstanding chengbao fees to Lin Gang (the 1^st Defendant/Po On Easy having paid RMB¥3.4 million as chengbao fees to Lin Gang – a subject matter of the 1^st Defendant’s counterclaim in this action).

41.That notwithstanding, the parties eventually failed to reach any amicable settlement in respect of their outstanding differences, and this resulted in the Plaintiff terminating all relevant agreements on 29 December 2000, and demanding repayment of the loans and other monies from the Defendants under the various signed agreements.  They thus formed the subject matters of the present action, which was commenced in 2001.

42.As against the 1^st Defendant, the Plaintiff claims the outstanding loans under the 3 facilities letters, possession of the 1^st property, outstanding fees, commission and monies payable under the two DLAs, outstanding monies payable under the SML Contracts, and outstanding monies under the two Equipment Loan to Trade Contracts.

43.The Plaintiff claims against the 2^nd Defendant as the borrower named in the 1^st and 2^nd facilities letters as well as the mortgages.  The Plaintiff also claims against the 2^nd Defendant as the mortgagor under the 2^nd mortgage for delivery up of possession of the 2^nd property.

44.The Plaintiff claims against the 3^rd Defendant as the borrower named in the 3^rd facilities letter as well as the 3^rd mortgage, for all sums of money due and payable by the Defendants to the Plaintiff as well as monies to discharge all other liabilities of the Defendants to the Plaintiff.

45.The Plaintiff also claims against the 4^th Defendant as the mortgagor named in the 3^rd mortgage, for all sums of money due and payable by the Defendants to the Plaintiff as well as monies to discharge all other liabilities of the Defendants to the Plaintiff.  The Plaintiff also claims for delivery up of possession of the 3^rd property.

46.Apart from the litigation in Hong Kong, the Plaintiff was also embroiled in litigation in Shenzhen as defendant in an action commenced by Lin Gang as plaintiff for outstanding chengbao fees.  In that action, Po On Easy and the 1^st Defendant were third parties.  In short, it was Lin Gang’s case that in fact it had entered into an arrangement with the Plaintiff (through the agency or under the disguise of Po On Easy, Qiu and the 1^st Defendant) for the subcontracting of the petrol stations and their operation to the Plaintiff in consideration of, amongst other things, the chengbao fees, which had become outstanding.  The claim was eventually rejected by the Shenzhen People’s Court, the judgment of which was upheld on appeal.

47.Apart from the litigation in Shenzhen, Lin Gang and the Plaintiff were also involved as parties in arbitration proceedings in Beijing in relation to the SML Contract.  In gist, it was argued against the Plaintiff that the Plaintiff had no right to license the service marks for use at the petrol stations under Mainland law and therefore Lin Gang was not liable in respect of the SML fees.  The arbitral body rejected the argument.  Its award was upheld by the Intermediate People’s Court in Beijing, which rejected Lin Gang’s application to set aside the award.

The 1^st and 2^nd Defendants’ case

48.Turning to the cases of the Defendants, firstly the case of the 1^st and 2^nd Defendants, who both gave evidence at trial.  Apart from them, they also called Liu Xi Lin and Tian Jin Bao, both formerly of Lin Gang, to give evidence.

49.The case and evidence of the 1^st and 2^nd Defendants, husband and wife, differed essentially from that of the Plaintiff in that they said from first to last, the 3 stations in question were the “investments” of Mobil.  In relation to the Fumin and Bei Huan stations, having learned from legal advice obtained that it could not have any direct participation in the construction and operation of the stations, the Plaintiff resorted to using the 1^st Defendant, Po On Easy and Qiu as the Plaintiff’s agents or vehicles in investing in the two stations. What in substance happened was that all monies required for the construction and setting up of these stations came from the Plaintiff, the construction and design of the stations were under the control and according to the direction of the Plaintiff, and so far as the operation of these station was concerned, it was in substance subcontracted to the Plaintiff, which paid a chengbao fee to Lin Gang, through the 1^st Defendant (i.e. the schedule 7 commission under the DLAs) and Po On Easy (i.e. the fixed fees payable by Po On Easy to Lin Gang under the Services Management Contract).

50.As far as the construction costs, land premiums, and the expenses required for the setting up of the two stations were concerned, they were paid by the Plaintiff under the disguise of the loans under the two facilities letters by the Plaintiff to the 1^st and 2^nd Defendants, and the loans advanced in turn by Qiu to Lin Gang under the Loan Contracts between the two.  It should be noted that under the Loan Contracts and the Services Management Contract between Lin Gang and Po On Easy, the so-called loans advanced by Qiu to Lin Gang relating to the construction of the service stations and the land premiums were basically non-repayable, so long as Lin Gang performed its part of the various contracts in allowing Po On Easy to run these stations and in cooperating to form the joint venture (in future provided that the law should allow it) with Po On Easy or its nominee.

51.It was the 1^st and 2^nd Defendants’ case and evidence that in fact in relation to the so-called loans under the facilities letters, there was no question of they being “repayable” either, so long as they had been applied towards these stations as directed by the Plaintiff and so long as the 1^st Defendant, Po On Easy and Qiu acted in relation to the construction and operation of the stations in accordance with the direction of the Plaintiff.  Likewise, there was no question of the enforcement of the mortgages either should everything be performed in accordance with the Plaintiff’s instructions.

52.In evidence, the 1^st Defendant pointed out that all legal documentation was prepared by the Plaintiff or the lawyers, who were in reality retained and paid for by the Plaintiff, and who took instructions from and prepared documents according to the wishes of the Plaintiff. 

53.In evidence, the 1^st Defendant also explained the background of his working for the Plaintiff, and the past business experience and cooperation that he had had with the Plaintiff.  In essence, he explained that in the matter in question, he merely acted as an investment vehicle for the Plaintiff so far as the construction and the setting up of the stations were concerned.  Furthermore, it was the Plaintiff which subcontracted the right of operation of the stations from Lin Gang, and he merely acted as a conduit pipe in passing on the chengbao fees.  His only substantive role in the stations was in relation to the actual operation of the stations, from which after deducting all payments due and payable to the Plaintiff under the various documents signed, he hoped to be able to make a profit.  That was the direct and immediate attraction and incentive for his entering into the arrangement in the first place.  He had complete trust and confidence in the Plaintiff.

54.He said in evidence that in meetings with both Chester Chan and Peggy Wu, they had assured him of the substance of the arrangement and that the loans would not be repayable (or they had not told him that the loans were repayable).  They repeatedly told him that the stations were the Plaintiff’s investments, and therefore there was no question of the 1^st Defendant being responsible for repayment of the monies expended by the Plaintiff in the land premiums, construction costs and the setting up of the stations (which comprised the so-called loans).  Furthermore, as it was the Plaintiff which subcontracted the operation of the stations from Lin Gang, the chengbao fees were also the responsibility of the Plaintiff, and there was no question of his being personally responsible for their payment (or repayment).

55.In evidence, the 1^st Defendant denied that he signed the Deposit Agreement on 22 October 1996 with Lin Gang agreeing to pay a sum of RMB¥200,000.00 to Lin Gang as deposit for payment of the land premiums and construction costs of the two stations, without first having been authorised or asked by the Plaintiff to do so, and before the Plaintiff had even agreed to proceed with the project. (The Deposit Agreement also provided for the payment by Po On Easy of annual chengbao fees of RMB¥1 million and RMB¥1.2 million for the two stations.)  The 1^st Defendant pointed out that contrary to Peggy Wu’s evidence, the contract signed was based on some earlier drafts prepared by the Plaintiff.  Moreover, he said that everything had been orally agreed in a hotel meeting or a series of hotel meetings held on or about 15 October 1996 at Shangri-La in Shenzhen, which was/were attended by representatives from Lin Gang, the Plaintiff (including Peggy Wu, Linda Chan and Chester Chan), Po On Easy and himself.  In the meeting(s), Lin Gang agreed to lower the deposit required from the previous figure of RMB¥2 million to RMB¥0.2 million.

56.In this regard, according to the evidence of Mr Liu and Mr Tian, then the persons in control of Lin Gang who gave evidence at trial in support of the Defendants’ case, an oral agreement was indeed reached with Peggy Wu in the meeting for the payment of the deposit.  Subsequently, the Plaintiff prepared the draft Deposit Agreement, which was amended by Lin Gang, and the same was eventually signed on 22 October.  According to Mr Liu and Mr Tian, Lin Gang was then urgently in need of money to pay the outstanding land premiums and start the construction of the stations, and was eager therefore to secure the commitment of the Plaintiff.  What was more important to Lin Gang at the time was the sincerity and commitment of the Plaintiff, rather than the amount of deposit, and that explained why Lin Gang was prepared to substantially reduce the amount of deposit required.

57.All this was quite contrary to the evidence of Peggy Wu who categorically asserted that the signing of the Deposit Agreement and the payment of deposit of RMB¥200,000 were the initiatives of the 1^st Defendant, who wanted to seize the investment opportunity for himself, with a view to entering into a financial arrangement with the Plaintiff (or failing which, some other interested oil company).  According to a fax dated 28 October 1996, Peggy Wu asked the 1^st Defendant to pay the deposit of RMB¥200,000.00 (and a construction deposit of RMB¥60,000.00) on behalf of the Plaintiff first which would be repaid later, they forming part of the Plaintiff’s “overall investment” (“總投資”) in the project.  The deposit of RMB¥200,000.00 was thus paid by Po On Easy to Lin Gang on 30 October 1996.  Peggy Wu, however, claimed that the fax simply represented her willingness to absorb the two deposit payments in any event as a matter of commercial decision, i.e. regardless of whether the project would be ultimately taken up by the Plaintiff or not.

58.The 1^st Defendant also denied in evidence that Peggy Wu had ever warned him of the investment risk of entering into the Deposit Agreement by himself (or given him any other warning at all), when the two met at a car race on 3 November in Zhuhai; rather the 1^st Defendant insisted that everything he did was done pursuant to the instructions and in accordance with the wishes of the Plaintiff.

59.The 1^st Defendant denied in evidence that he was ever told or made aware of the alleged 80% or 60% lending/mortgage policy of the Plaintiff.  He said that the mortgages were provided to the Plaintiff to ensure that the monies obtained under the facilities letters would be applied by him towards the petrol station project as directed by the Plaintiff, and that he would act according to the Plaintiff’s instructions in its project.

60.The 1^st Defendant said that if he were ever told by the Plaintiff that the Plaintiff was not the “investor” in the project and that he personally was the “investor” and the Plaintiff’s role in the matter was merely that of a lender of money, he would not have entered into the transaction at all.  For as explained, his intention was merely to act as the dealer and operator of the service stations, he having been acting as the Plaintiff’s dealer/retailer of LP gas and gasoline in Hong Kong.

61.The 1^st Defendant said that he completely trusted the Plaintiff.  He and his family owed their businesses and livelihood to the Plaintiff (by acting as the Plaintiff’s dealers).  He said he never doubted what he was told by Peggy Wu and Chester Chan regarding the nature of the Plaintiff’s involvement in the project and his own role.  He never asked for anything in black and white from the Plaintiff to protect his own interest.  As for the so-called comfort letter referred to by Peggy Wu, he said that the idea (for something black and white) was raised to him by a LP gas manager of the Plaintiff.  He then mentioned it to Peggy Wu who came up with the comfort letter in both Chinese and English.  He said he noted that the comfort letter did not say and go so far as what he had been promised orally.  He said that in the light of what he had been orally assured, he did not think much about the discrepancy between the written words and what he had been orally promised.  He said that given the background (i.e. the oral assurances that he had been given), the comfort letter was good enough.  He did not pursue the matter further with Peggy Wu and instead agreed to countersign the comfort letter which had been signed by Peggy Wu.

62.As to the involvement of his lawyer friend, he said that he played more the role of a friend than a lawyer.  He did not find it necessary to consult his lawyer friend regarding the terms of the documents that he was required to sign.

63.As regards the signing of the various documents, both he and his wife said that essentially no interpretation or explanation was offered to them prior to their signing of the various documents, except that the wife could recall that on one occasion, their right to obtain independent legal advice was mentioned.  But according to the wife, the 1^st Defendant did not find it necessary to do so as he completely trusted the Plaintiff.  The 1^st Defendant said that he was completely unaware of the fact that under the DLAs, he was responsible for the repayment of the commissions/chengbao fees in the event that the project should fall through (as it has happened).

64.Both Mr Liu and Mr Tian, to varying extents (as Mr Tian was more a technical and engineering man), said that the Plaintiff was the real investor and the entity which subcontracted the operation of the filling stations up to 2026 from Lin Gang.  All payments were in fact made by the Plaintiff through Po On Easy and Qiu, and the chengbao fees were the responsibility of the Plaintiff.

65.They confirmed that in mid 2000, Lin Gang sold its interest in the three stations to Qiu and Po On Easy.

The 3^rd Defendant’s case and the Song Gang station

66.As regards the Song Gang station, in gist, it is the evidence of the 1^st and 3^rd Defendants that the arrangement for the Song Gang station basically followed that of the other two stations, with the exception that the Song Gang station was an existing station, and the so-called loan made by the Plaintiff to the Defendants and the money advanced by Qiu to Lin Gang was in substance the fees paid by the Plaintiff to acquire Lin Gang’s capital interest in this station.  Chengbao fees had been agreed to be payable by the Plaintiff to Lin Gang.  However, as business was bad from the very beginning, the 1^st Defendant could not reach agreement with the Plaintiff about the payments under the DLA, and as a result no DLA was signed.  This gave rise to a specific problem in that as no DLA was signed, no schedule 7 commission was payable by the Plaintiff as such, and indeed the Plaintiff did not pay the chengbao fees (as per the Defendants’ case).  This gave rise to much difficulty and dispute between the parties, and eventually the 1^st Defendant paid from his own pocket part of the outstanding chengbao fees (this forms the subject matter of a counterclaim for RMB¥3.4 million by the 1^st Defendant against the Plaintiff) in order to keep the station going.

67.The matter was complicated by the merger of Exxon and Mobil in 1999, the transfer out of Peggy Wu and Chester Chan from the China Retail Department of the Plaintiff (Linda Chan having departed in late l996), and the taking over of the matter by essentially Exxon people.

68.Negotiations were entered into involving the Plaintiff, Lin Gang, Po On Easy/Qiu, the 1^st Defendant and the 3^rd Defendant.  A set-off agreement was reached in 1999 between the then manager of the Plaintiff (Mr Cheng) and the 1^st Defendant whereby, amongst other things, the Plaintiff agreed to reimburse (by way of set-off) the 1^st Defendant the sum of RMB¥1.4 million being part of the outstanding chengbao fees that the 1^st Defendant had paid to Lin Gang on behalf of the Plaintiff.

69.However after negotiations and talks, a global settlement and re-adjustment of the terms previously agreed regarding the Song Gang project failed to materialise towards the end of 2000, basically because Lin Gang (then already under the control of Qiu) refused to sign the agreement.

70.The Song Gang station was eventually re-possessed by Lin Gang, with the 3^rd Defendant – who had acted as the dealer and operator of the station – kicked out.  The Plaintiff issued letters to terminate all the relevant contracts that it had entered into with Lin Gang, Po On Easy and the Defendants, and demanded repayment of monies pursuant to those contracts from the Defendants.  Eventually that led to the commencement of the present action.

71.The 3^rd Defendant said in evidence that apart from the oral representation made to her by the 1^st Defendant, Chester Chan had told her in meetings that the Song Gang station was the Plaintiff’s investment, and there was no need whatsoever for her to repay the so-called loan or interest under the facilities letter.  Her role was merely to pass on the sum of money that the Plaintiff was going to give her (and the 1^st Defendant) to the seller of the station (Lin Gang) on behalf of the Plaintiff as purchaser.  She had to provide the title documents of the 3^rd property as security (against her selling the station), and she was granted the right to operate the station as dealer.  The 3^rd Defendant said in evidence that there was no way she would have been agreeable to entering into the project as investor herself and borrowing such a substantial amount of money from the Plaintiff to invest in a service station in the Mainland, she having no experience whatsoever in service stations before.

72.She said Chester Chan told her that when the Mainland should eventually enter into the World Trade Organisation, the title deeds would be returned to her.  Chester Chan also said that the Plaintiff would be responsible for payment of the chengbao fees.

73.Her evidence regarding the execution of documents tallied with the evidence given by the 1^st and 2^nd Defendants – essentially there was no explanation or interpretation of the documents to them by the lawyer (who was called to give evidence by the Plaintiff), who merely asked them to sign the documents after having ascertained from them that they had agreed everything with the Plaintiff.

The Court’s approach

74.The Plaintiff’s case in this action is straightforward enough.  It sues on the various documents that have been signed by the Defendants.  There is no serious dispute that according to the provisions of these documents, the Plaintiff is quite entitled to the relief that it is seeking.  What is really in dispute is whether these documents were intended to mean what they say, and whether they represented the complete agreement or understanding between the parties.

75.On the pleadings, numerous defences have been raised against the Plaintiff’s claim.  At trial, Mr Jonathan Chang, counsel for the 1^st and 2^nd Defendants, very helpfully restricted himself to some of them only, which will be dealt with in this judgment.  In essence, Mr Chang argued at trial that the three stations were the Plaintiff’s “investments”, and almost by definition, the so-called “loans”, which were in truth and in substance the capital investments of the Plaintiff in the three stations, are not “repayable” by the Defendants.  He also argued, on the basis of the evidence given by his clients, that oral assurances had been given by both Peggy Wu and Chester Chan on behalf of the Plaintiff to the 1^st Defendant that the so-called loans were simply not repayable (if – in substance – the Defendants should follow the Plaintiff’s instructions regarding the development and running of the two stations, on which there was no issue).

76.The above, of course, only represents a simplified version of the issues raised by the parties.  Quite plainly, the burden of proof lies with the Defendants to establish the matters that they rely on, which are extraneous to the signed written documents, in order to found a defence to the Plaintiff’s claim based on the documents.

77.As far as the material disputes of fact are concerned, I have carefully considered the evidence (including the demeanour) of the various witnesses that have been called, the voluminous documentary evidence, and the known, undisputed or indisputable surrounding circumstances of the case.  I have carefully borne in mind the burden and standard of proof.  I have, in particular, considered the inherent probabilities and improbabilities of the respective contentions of the parties.  I have, of course, carefully borne in mind the respective submissions of the parties – both oral and written, although for obvious reasons, I cannot and need not mention or deal with each and every one of them in this judgment.  I base my findings of fact on the entirety of the evidence that has been placed before me, although, again, for obvious reasons, I cannot and need not refer to or deal with each and every piece of evidence in this judgment.

78.Having done so, I have come to several key conclusions or findings on the facts.

First conclusion on the facts

79.First, I have no doubt (on the civil burden and standard of proof) that from first to last, the Plaintiff regarded the three stations in question as its “investments” – in the general commercial sense of the word.  As I have pointed out to Mr Chang during his opening submission, “investment” is not a term of art.  In fact, it is a very loose concept, and more importantly, an investment is very often capable of being carried out in a number of ways, involving different legal structures and frameworks.  The upshot of all this is that, in relation to Mr Chang’s main argument in this case, categorising the three stations as the Plaintiff’s “investments” would not by itself take Mr Chang’s case home.

80.Before I go further in dealing with Mr Chang’s argument, I should elaborate on my first conclusion.  On the evidence as a whole, I am quite certain that the Plaintiff was from the beginning very interested in the two stations.  Initially, it wanted to participate in the development of the two stations as an equity partner of Lin Gang, either in the name of the Plaintiff itself (and there were draft documents naming the Plaintiff as a party) or through one of its FIEs.  However, legal advice that the Plaintiff had obtained deterred the Plaintiff from adopting that course.  But the Plaintiff did not give up, and eventually the in-house counsel of the Plaintiff came up with a scheme that was, after some revisions, eventually put into effect, resulting in the various signed documents that constitute the subject matters of the present action.

81.Despite the evidence of Peggy Wu, I am quite satisfied on the evidence as a whole that the Plaintiff was the mastermind of all the documents that were signed by the parties, which included not only those documents to which the Plaintiff was actually a party, but also those that were signed by, for example, Lin Gang, Po On Easy and Qiu amongst themselves.  I am quite satisfied on the evidence that the Plaintiff played a most substantial role (with the assistance of the various lawyers – in Hong Kong and the Mainland) in deciding what documents to prepare, and the actual preparation and drafting of the legal documents.

82.All this is quite plain to me from the evidence (oral and written) regarding the choice of lawyers, the contacting with the lawyers, the transmission of the various drafts, the input of the Plaintiff to the drafts and the payment (whether direct or via reimbursement) of the legal fees of the lawyers.

83.In this regard, of course, I am not saying that Lin Gang did not have any input in relation to the preparation of the legal documentation.  As the legal owner of the stations in which the Plaintiff was “investing”, Lin Gang of course had much to say regarding the terms of some of the documents that affected Lin Gang’s interest.  Likewise, the 1^st Defendant also had, in my finding, some input regarding the contents of some of the documents, particularly the two DLAs, as they directly affected his interest in the operation of the stations.

84.But apart from these, as a whole, in my finding, the Plaintiff was the mastermind behind the whole investment plan in the stations and the legal documentation involved.

85.All this is explained by the fact (as found by me) that from first to last, the Plaintiff treated the three stations as its investments.

86.That explains why the Plaintiff played a most substantial role not only in the preparation of the legal documentation, but also in the actual construction and development of the two stations (Fumin and Bei Huan).  Put another way, I find as a fact that in substance the two stations were constructed and developed by the Plaintiff in accordance with its requirements and instructions and at its own costs.  The input of others, including the 1^st Defendant, was minimal.  I do not accept Peggy Wu’s lame explanation that the Plaintiff’s heavy involvement in the construction of the two stations was only because the 1^st Defendant was inexperienced and the Plaintiff wanted to play an “advisory” or “consultancy” role in the matter.  In my judgment, the Plaintiff was not an adviser, it was an investor.

87.My first conclusion also explains why in many of the contemporaneous documents, including a number of internal documents or other documents generated by the Plaintiff, the stations were referred to as the Plaintiff’s “investments”.  Amongst them, I would include the Plaintiff’s internal “Shenzhen Market Analysis (the “Analysis”) prepared on or around 22 November 1996 for the purpose of enabling the top management of the Plaintiff to approve the HK$22 million loan to the 1^st and 2^nd Defendants, which was heavily relied on by Mr Chang in support of his case on investment.

88.I have also borne in mind here the various documents that Mr Chang had lost no time in drawing the Court’s attention to in his submissions, in which Peggy Wu or Chester Chan asked the 1^st Defendant to make payment of various expenses in connection with the construction of the two stations “[on the Plaintiff’s] behalf” and promised to reimburse the 1^st Defendant for the monies, which would constitute part of the Plaintiff’s “overall investment”.

89.My first conclusion also explains why as a matter of fact, in relation to the construction and development costs and expenditure of the two stations, apart from those that were meant to be and were in fact covered by the HK$22 million loan advanced under the two facilities letters, the Plaintiff was also prepared to and did, mostly through the 1^st Defendant, pay for the extra expenditure and costs.

90.All this also explains why after completion of construction of the two stations, the Plaintiff continued to play such a high profile role in relation to, for instance, the ceremonial opening of the two stations, and their subsequent running and operation.

91.The same observations, of course, with necessary modifications, can also be made in relation to the Song Gang station, which was an existing station, unlike the other two stations.  Thus, in the correspondence, the Plaintiff talked about “acquiring” the station from Lin Gang, and after its “acquisition”, the Plaintiff also played an important role in the operation and running of the station.

92.In fact, quite importantly, this first conclusion of mine explains why in substance despite the denials of Peggy Wu and other witnesses called by the Plaintiff, the chengbao fees of the Fumin and Bei Huan stations were paid by the Plaintiff to Lin Gang, via the schedule 7 commissions under the two DLAs and the annual fees payable by Po On Easy to Lin Gang.  I do not accept the disingenuous explanations proffered by the Plaintiff’s witnesses regarding the nature of the schedule 7 commissions.  Having compared the schedule 7 commissions with the annual fees payable by Po On Easy to Lin Gang, it is quite clear that the two payments were part and partial of the overall plan devised and masterminded by the Plaintiff, in order to achieve its object in investing in these stations – an important component of which was the payment of very sizeable chengbao fees to Lin Gang in exchange for the right to operate these stations for 30 years or pending the formation of the joint venture (should there be a subsequent relaxation of the Mainland restriction on foreign investment).

93.Likewise, the above explains the readiness of the Plaintiff to pay some of the outstanding chengbao fees in relation to the Song Gang station, notably under the settlement agreement signed in 1999 (by a Mr Cheng on behalf of the Plaintiff – who has since left the Plaintiff and was not called to give evidence at trial).  Here, I accept (to the present extent) Mr Chang’s argument that one really cannot separate the capital investment relating to the construction and development of the first two stations or the “acquisition” of the Song Gang station from the chengbao fees which related to the operation of the stations after their construction or acquisition.  The two came in a “package”, as Mr Chang put it.  All this explains why despite the failure of the parties to agree on the terms of a DLA in respect of the Song Gang station, and thus the absence of any obligation on the part of the Plaintiff to pay any schedule 7 commission to the 1^st Defendant, the Plaintiff was nonetheless prepared to shoulder some of the outstanding chengbao fees regarding that station.

94.My first conclusion also explains why the Plaintiff was prepared to and did entertain requests for payment of all sorts, from various parties, including in particular Lin Gang.  It also explains why from the angle of Lin Gang, as detailed in the evidence of Mr Liu and Mr Tian, the stations were regarded as the Plaintiff’s “investments”.  The two gentlemen, both formerly of Lin Gang, admitted in evidence that they were not privy to the internal arrangement between the Plaintiff on the one part and the 1^st Defendant/Po On Easy/Qiu on the other.

95.Again my first conclusion explains why the legal documentation was not prepared and executed in one go.  Rather, some documents (the facilities letters and mortgages) were executed first, to be followed by the advancement of monies (by instalments), and yet to be followed by the execution of further documents by the parties concerned.  That also explains why in fact in relation to the Song Gang station, the “acquisition” of the station by the Plaintiff and the operation of the same via the 1^st and 3^rd Defendants went ahead despite the failure to sign the DLA.  There was no question of the Plaintiff not advancing any money prior to completion of all documentation, nor was there any question of the Defendants not preparing to borrow any money from the Plaintiff before completion of the legal documentation, for everything was orchestrated by the Plaintiff under a master plan devised by it.  To that extent, again I accept Mr Chang’s analysis of the situation regarding the legal documentation and the advancement of monies in his final submission.

96.My first conclusion explains why both before and after the signing of the many documents in question, the Plaintiff had described these stations as its investments to various people, including the Defendants, Lin Gang, the lawyers and others.  But so far as the 1^st and 2^nd Defendants are concerned, there was no question of any misleading or false representations by reason of what I am going to set out by way of my second and third conclusions.

97.That the Plaintiff has also referred to the stations as the Defendants’ “investments” – particularly in this action, is not inconsistent with my first conclusion.  For as will be made clear in my following conclusions, the whole point of the exercise of the Plaintiff was not to become the “investor” of the stations in the legal sense (that would infringe Mainland law), and thus someone else (i.e. Po On Easy/Qiu) should take up that role.  But that does not preclude the Plaintiff from being an investor in the commercial sense of the stations at the same time.

98.Not only did the above explain the various features that the Court found in the present case, those features constituted some of the more important reasons for my coming to the first conclusion in the first place.  Of course I must emphasize here that the role of the Court is not to explain each and every happening or event.  That would have been the role of a detective or investigator.  The role of the Court is to make relevant findings of fact from the entirety of the evidence, in accordance with the burden and standard of proof.  Furthermore, I must point out this: my first conclusion, as I mentioned above and quite contrary to Mr Chang’s contention, does not by itself conclude the matter in favour of the Defendants.  As I explained above, Mr Chang’s point is that if the Court should conclude – as he has contended – that the stations were in truth and reality the “investments” of the Plaintiff, then by definition, the Plaintiff’s capital investments in the stations (i.e. the construction costs and the acquisition costs), as represented by the “loans” advanced under the three facilities letters, would be non-repayable, and there would be no question of their being “repayable” by the Defendants. 

99.As indicated above, I do not accept the argument.  The fallacy of the argument of counsel lies in his use of the word “investment”.  As I pointed out above, “investment” is not a term of art.  It bears no definite legal meaning, although in everyday usage and in commercial life, everybody has some general idea of what an investment is.  But for the present purpose, I must emphasize that an investment can take many forms, both legally and commercially speaking.  My first conclusion, as stated above, is that commercially speaking the Plaintiff regarded the stations as its investments.  That leaves open the question of how or the means by which the Plaintiff sought to carry out or implement its investment intention. 

Second conclusion on the facts

100.This brings me to my second conclusion on the facts, namely that the Plaintiff did intend to carry out and implement its investment intention in the stations by the composite plan or scheme as represented by the entire legal documentation.  In other words, the legal documentation was not intended to be a sham, but truly reflected the parties’ contractual intention.  To be more precise, the legal documentation was not intended to be a sham to conceal the Plaintiff’s true intention, or otherwise to evade or unlawfully bypass the legal restriction in the Mainland against foreign “investment” in petrol stations in the Mainland.  Quite the reverse, precisely because of the legal restriction, I find that the Plaintiff devised and implemented the composite plan as represented by the legal documentation in its entirety in order to firstly, comply with (or one could say lawfully avoid) the legal restriction in the Mainland, and secondly, achieve its intention to invest (in the commercial sense) in the stations.

101.The legal documentation, and the composite plan represented by it, involved, amongst other things, the lending of money to the 1^st and 2^nd Defendants (and subsequently the 3^rd Defendant) so as to enable them to lend the money (through Qiu) to Lin Gang.  They were (and so I find), so far as the Plaintiff and the Defendants were concerned, intended to be genuine loans.

102.Pausing here, I need to explain that the suggestion that the legal documentation was a “sham” was never raised as such in the Defendants’ pleadings, although the word “sham” had been used by the 1^st Defendant in one of his affirmations.  At the beginning of the trial, Mr Chang on behalf of the 1^st and 2^nd Defendants specifically disavowed any intention to argue that the legal documentation was a sham.  However, as the trial proceeded and the respective cases of the parties unfolded, it was plain to everyone that the Defendants were in substance arguing that the legal documentation was merely a formality or façade deployed by the Plaintiff to formally comply with the relevant law but in substance to achieve its object of investing in the two stations in a way prohibited by Mainland law. 

103.This led, quite understandably, Mr Ng SC, counsel for the Plaintiff, to spend much time and effort in his final submission to emphasize to the Court that the Defendants were in fact running an unpleaded case of fraud and dishonesty.  Counsel complained that the Defendants were in effect saying that the Plaintiff sought to evade the relevant Mainland restriction by the legal documentation and the (alleged) unwritten assurances and understanding between the parties (see below), which was indeed a very serious charge to make against anybody, not to mention a reputable international company like Mobil.  Mr Chang argued in response during final submission that the 1^st and 2^nd Defendants need not go that far and supply the reason for the Plaintiff’s decision to implement its investment intention in the way it did.  He was content to argue that the legal documentation notwithstanding, the real underlying composite transaction was the Plaintiff’s “investment” in the stations in substantive contravention of the Mainland restriction, as evidenced by the oral assurances that the Plaintiff’s staff had made to the 1^st Defendant (as well as the 3^rd Defendant).

104.I can understand the respective contentions of counsel.  On the evidence as a whole, I have come to the conclusion that nothing of the sort directly or indirectly contended for by the Defendants or hinted at by their counsel represented the truth in relation to the legal documentation.  I find that in its attempt to achieve its intention and object to invest in the two stations commercially, the Plaintiff desperately looked for and eventually came up with a plan which would, as I say, at the same time take care of the law and allow the Plaintiff’s wish to materialise, in all probabilities (see below).

105.It is plain from looking at all the documents that were signed by the various parties, comprising the entire legal documentation, that none of them, on the face of it, would be caught by the legal restriction in the Mainland (subject to the illegality argument to be discussed below).  Far from indicating that they were therefore sham documents designed to evade the Mainland restriction, in my judgment, they were what they were precisely because the Plaintiff wanted to comply with Mainland law and avoid infringing the relevant legal restriction.

106.Mr Chang, in both his opening submission and his final submission, accepted and conceded that in fact, not only did the legal documentation comply with Mainland law, it was also effective, at least in theory, to enable the Plaintiff to achieve what it had wanted to achieve from the very beginning, i.e. to commercially invest in the stations.  No sham document or transaction need be resorted to.  No unwritten or hidden promises, agreements or understanding need be involved.  Nothing extraneous to the legal documentation was required in order for the Plaintiff to achieve what it had wanted to achieve – subject to a rider which I would mention in due course regarding illegality.  However, Mr Chang argued that the problem with the plan as appearing on the face of the legal documentation was that it provided insufficient incentive to somebody like the 1^st Defendant, or worse still someone like the 3^rd Defendant, to agree to take part in it.  In particular, counsel submitted in effect that nobody in his or her right mind would be prepared and willing to borrow such a substantial loan from the Plaintiff to invest in the development or acquisition of the stations, merely for the purpose of obtaining the right as dealer to run the same.  This was particularly so in the case of the 3^rd Defendant who hardly knew the Plaintiff prior to the events in question, and who by background and working experience had nothing to do with petrol stations or investment in the Mainland.

107.To this end, I have of course considered the entire evidence.  There were quite some internal documents of the Plaintiff evidencing the genesis of the investment plan and the thinking of the Plaintiff at the material time.  In particular, the Plaintiff’s Shenzhen Market Analysis, relied on heavily by Mr Chang to support his argument that these stations were the Plaintiff’s investments, actually set out the Plaintiff’s thinking at the time rather comprehensively. 

108.The Analysis, according to the evidence, was prepared internally in order to enable the top management to decide whether to enter into the whole deal or not.  Some of the more relevant portions of the Analysis are reproduced below:

“IV.  Business Terms
Site 1 &2
1)  Parties
PRC Co.2 –		Shenzhen Jianshe Oil and Gas Station (深圳建設油氣總站) [i.e. Lin Gang].  The business licence holder & the Land Use Certificate holder.
2)  Business Licence
The business scope under the business licence allows both wholesale and retail of fuels.  It was issued to Party A [i.e. Lin Gang].  The key commercial terms on the proposal that they are offering to Mobil is:
1)	Option Fee for Site 1 [i.e. Bei Huan Road]
a)	Before the opening to the main road:   1 MMRMB/yr (120 MUSD/yr)
b)	After the opening to the main road:
	i)	From yr 1 to yr 5:   1.2 MMRMB/yr (144) MUSD/yr)
	ii)	From yr 6 to yr 30:   1.9 MMRMB/yr (228 MUSD/yr)
2)  Pay Option Fee in advance for 5 years by two installments
3)  Land Status
The title of the 2 pieces of land were leased by the Land Bureau to Party A at a price of 6.0 MMRMB (720 MUSD) for site 1 and 7.2 MMRMB (864 MUSD) for site 2 [i.e. Fumin Road].  The Land Use Certificate has yet to be issued because Party A has not settled the payment.  However, the Land Grant Contracts were signed already.
The zoning of the land was originally for service station use.
4)  Proposed contractual relationship between the parties if Mobil take over the Management right (Re: Figure A)
4.1)  Contract between PRC Co.1 and PRC Co.2
PRC Co.2 agrees to –
*	give/grant the Management right of the station to Mr. Or/PRC Co.1 [i.e. Po On Easy] for 30 years
*	sign an option contract to form a JV with PRC Co.1 or her designated person/company.
PRC Co.2 will pay the management service Fee (all after tax income of the service station operations) to PRC Co.1.  Moreover, PRC Co.1 needs to settle the land price for the PRC Co.2, i.e. 14.0 MMRMB at year 0.
…
VIII.  Capital Requirement & Spending Pattern
Under the Management Contracts to be concluded on the two stations, Mobil will pay for the land grant fee for the 30 years lease & be responsible for all the capital required for the construction of the stations in exchange for the exclusive right to operate the two service stations.  The capital required is as follows:

(MUS$)	Land Grant	Construction	Equipment*	Total
Fumin Road Station	865	438	300	1,603
Bei Huan Road Station	819	525	300	1,644

*  estimation inclusive of 30% import duties on all imported equipment

We request concurrence for the appropriation of a total of MUS$ 3,249 for the acquisition of these 2 service stations in Shenzhen.  In our SOR 1996, we have budgeted MUS$ 700 for 2 “N” stations on an appropriation basis under Capital.  For the Management Contracts to be concluded on these 2 s/s, we will secure them as modified “N” stations with PRC Co.1 owning management service rights.  The Capital spending on these 2s/s will be:

	1996 2H Capital		1997 Capital
	Budgeted	Actual	Budgeted	Actual
Fumin Road Station	175	1.040**	175	500
Bei Huan Road Station	175	994	175	500
Total	350	1882	350	1000

** MUS$ 1,040 and MUS$ 994 are made up of MUS$ 865 and MUS$ 819 for land grant fee & MUS$ 100 for initial construction cost respectively.

IX.	Legal Structure
1.	The proposed investment structure is an interim solution to enable Mobil to lock in these 2 lucrative sites before a FIE with the business scope to invest & operate service stations can be established to hold these stations.
2.	There are two sets of contractual arrangement, the first set being the agreements between the dealer in HK & MOHK.  That include:
	a.	A loan agreement with Mr. Or & Mrs Or (“Or”), the legal owners of the property to be mortgaged to MOHK.  This will be a RMB 22 million equivalent loan, which covers the total amount of investment on these 2 s/s.  In return, Or will pledge three property to MOHK, two of which are residential properties, the total amount of this mortgage will be RMB 13 million equivalent in value.  Or will be personally liable for the other RMB 9 million loan amount.  For MOHK, the RMB 22 million of land premium and construction should be considered as a non-repayable loan to the dealer.  However, if MOHK form/acquire an approved FIE to replace PRC Co.1, the investment will become the capital of the new JV.
	b.	There will be a separate Trademark License Contract among MOPET, MOHK & PRC Co.2, which ties in the sell-out volume of fuels supplied by MOHK or MOHK’s designated source in China with secured percentage of return to MOHK.
	c.	MOHK will conclude a Dealers Supply Contract with Or, which requires Or, among other obligations contained in a standard Supply Agreement, to procure “PRC Co.2” to buy all products from Mobil designated source.  This Contract will set out Mobil’s requirements & operating standards in appointing Or to be the dealer of these 2 s/s.
	d.	Or will procure PRC Co.1 to form a JV with PRC Co.2 and assign the interest in the JV to MOHK at no premium.
3.	Ownership. PRC Co.1 is a private limited company incorporated & registered in Shenzhen.  The shareholders are Mr. Yau Man Long [i.e. Qiu] (80%) who is also the legal representative & Mr. Yau Kwai Zhong (20%), both of which are close relatives of Or.  In due course, Or will become the legal representative of PRC Co.1.
PRC Co.2, Shenzhen Lin Gang Petroleum Company Limited深圳市林港石油實業有限公司is a limited company incorporated under the PRC Company law in 1996 (a mandatory requirement of Shenzhen SAIC for a selected group of state own companies).  After the transformation, it remains a state owned company Mr. Lin being the legal representative.  The company is an independent legal person, capable of signing contract & bearing civil liabilities.
4.	Another set of agreements will be signed by PRC Co.1 with its own independent legal advice, which is a company formed by Or in Shenzhen with PRC Co.2 which is the s/s operating licence & lease holder.  The structure is as follows:
	a.	An option contract, giving PRC Co.1 the right to form a JV with PRC Co.2, the key commercial terms of this JV will be spelled out in the Option contract.  This Option shall include the right for PRC Co.1 to assign another party to replace it as the JV partner of the future JV.  The option contract will also provide that the two pieces of land, legal title of which belong to PRC Co.2 shall be transferred to the JV for the whole 30-year cooperation period.  PRC Co.1 will pay an option fee for this right which in effect is the Chengbao fee of the stations.
	b.	A Management Service Agreement whereby PRC Co.2 will appoint PRC Co.1 as the operator of the s/s.  Through this Agreement, PRC Co.1 will in practice, be the entity which operate the s/s & be responsible for procuring the products from Mobil.  All the net income from the s/s shall be paid to PRC Co.1, in consideration of providing such management service to PRC 2.
	c.	Or will arrange an entrusted loan with a local PRC bank under which Or will deposit an equivalent amount of RMB 22 million (RMB 14 million for land) at the bank in his own name.  This deposit will be used as a collateral for a RMB 22 million loan to PRC Co.2.  The bank will require PRC Co.2 to mortgage the land & assets of the 2 stations to the bank.  This entrusted loan will continue until such time that the JV between MOHK & PRC Co.2 is formed, then all the assets on the s/s will be transferred to the JV.
	Note:   The Option Contract and Management Service Agreement may not be fully enforceable under PRC law.
5.	Contracts between MOHK and PRC Co.2
	a.	To capture the retail & supply margin on the fuels sold at the 2 stations, MOPET which owns the trademark of Mobil, will sign a Service Mark Licence with PRC Co.2.  This Licence will provide that PRC Co.2 shall be permitted to use Mobil trademark in consideration of a Service Mark Licence fee.  Actual products sold (sell-out volume) at the s/s will be monitored on a month-to-month basis, the figures will be used for calculating and effecting margins for MOHK as licence fee.
	b.	MOHK will sign an equipment loan to Trade Contract (ELT) with PRC Co.2 for all the equipment which worth RMB 5 million. (Although there is practical difficulty in re-possessing equipment from PRC Co.2).  All the equipment will become capital of the JV to be formed between MOHK & PRC Co.2.
X.	Financial Arrangement
1.	Funding
MOHK will invest totally RMB 27 million and pay out the RMB 22 million equivalent loan to Or in Hong Kong as straight loan to finance the land & construction cost.  The balance RMB 5 million will be as ELT to cover all the equipment cost.  As a collateral for this RMB 22 million loan, Or will mortgage 3 properties, worth RMB 13 million to Mobil.
Or in return will finance PRC Co.2 through the following means:
	a.	RMB 22 million entrusted loan, arranged through a PRC bank to pay for the land price and the construction cost (RMB 8 million) thru’ PRC Co.2.  In return, PRC Co.2 will pledge the land & the assets of the 2 service stations as collateral;
	b.	RMB 5 million as Equipment Loan to Trade PRC Co.2, which include the total value of all the equipment used at these 2 s/s.
2.	Income Assignment
The legal owner of the Trademark Licence fee collected for fuels sourced locally belong to MOPET, so, approval from MOPET on this Licence has to be secured.  In addition, MOPET has to approve the assignment of this Licence Fee to MOHK.  This will be the first time for MOHK to seek MOPET’s approval on the use of its Trademark by third party.  In the economics calculation, we assume that such assignment is feasible & so a withholding tax of 20% is payable on the income derived from this source.”

109.As I said above, there can be no doubt that the Plaintiff treated the two stations as its investments.  But that does not answer the question as to the nature of the investments or more importantly the legal mechanism used to effect or implement the investment intention.  The answer can be gleaned from the Analysis, which set out not only the commercial and financial sides of the matter, but also the legal structure.  And so far as the legal structure is concerned, it clearly referred to the making of the loan to the 1^st and 2^nd Defendants under a loan agreement, amongst the various components of the plan.  I will shortly come back to the reference in the Analysis that the loan “should be considered as a non-repayable loan to the dealer” (para. 2(a), Section IX).  However, the important point to note, in the present context, is that in this contemporaneous internal document prepared by the Plaintiff’s staff for its top management, for the specific purpose of enabling the top management to make a decision on whether to go ahead with the plan, there was no mention whatsoever that the legal structure, or the legal documentation to be prepared, was merely intended to be a façade, front or formality in order to disguise or conceal the true intention or plan of the Plaintiff in directly “investing” in the two stations in contravention of the Mainland restriction. 

110.It is true that the Analysis openly and repeatedly referred to the Plaintiff’s involvement in the two stations as its “investment”, but as explained above, that begs the question of the meaning of the word “investment” as used in the Analysis and the means to achieve it.  The important point here is that quite plainly from the Analysis, the legal structure and legal documentation were intended to be the means to implement and carry out, rather than to conceal or disguise, the intended investment.  There was no intention to flout the Mainland restriction or law.  Nothing of that sort was mentioned in the Analysis.  In fact, the whole point of the legal structure, and the trouble that the Plaintiff would go into in implementing the structure, was precisely to enable the Plaintiff to comply with the law of the Mainland.

111.To be sure, the Analysis warned that the option contract and management service agreement explained in the Analysis “may not be fully enforceable under PRC law” (para. 4 – bottom paragraph, under Section IX).  But that concern about enforceability of some of the documents in the Mainland was quite different in nature and in kind from the point made by Mr Chang at trial – that the legal documentation (and in particular the loan agreement) did not mean what it said, and was in substance a sham.  Quite rightly, Mr Chang did not place any or any significant reliance on this paragraph at all in his detailed submissions.

112.Taking one step further and anticipating the next conclusion that I am going to set out in this judgment, the Analysis did not refer to any under-table, secret or unwritten components comprising the legal structure to carry out or implement the intended investment.  In other words, the Analysis did not say that apart from the legal documentation or the legal structure set out expressly in the Analysis, there were going to be, as part of the means to carry out or implement the intended investment, some further unwritten agreements, understanding or arrangements between any of the parties to be involved, such as the oral assurances that the Defendants contend for in this action. 

113.Mr Chang did not in his elaborate submission suggest any reason why there should have been omitted from the Analysis, which he so heavily relied on to establish his investment argument, any reference to any such secretive, unwritten or under-table agreements, assurances or understanding.  And very fairly, in final submission, Mr Chang conceded of his own volition that his clients’ case on investment and oral assurances were interlinked to the extent that realistically, if the Plaintiff was the real “investor” in the stations (in the sense used by him), by the nature of things, there should have been oral assurances made to that effect to his clients.  Yet no such oral assurances, secretive understanding or under-table agreements were recorded or hinted at in the Analysis, which as I said, was a contemporaneous internal document, and which was supposed to set out the gist of the intended investment for the benefit of the top management.

114.The nearest thing that Mr Chang could find in the Analysis in support of his contention was the phrase that the loan “should be regarded as a non-repayable loan to the dealer [i.e. the 1^st and 2^nd Defendants]”.  However, on the entire evidence before me, I think Mr Ng was correct in laying emphasis on the opening phrase of the sentence that contained the part that Mr Chang relied on, namely “For MOHK [i.e. the Plaintiff]”.  In my judgment, based on the entirety of the evidence, the fair way of reading this part of the Analysis is that the author was telling the top management that internally for the Plaintiff, the loans to the 1^st and 2^nd Defendants should be regarded as non-repayable in the normal course of events.  In my judgment, it represents the farthest the Defendants could advance their case regarding the true nature of the loans, on the evidence before the Court.  That the loans should be regarded as non-repayable internally by the Plaintiff does not necessarily mean, as I pointed out to Mr Chang during his final submission and as Mr Ng was at pains in his own final submission to stress, that that internal understanding of the Plaintiff must have been communicated to the Defendants.  As I said, I will shortly come to deal with the question of oral assurances and thus this internal understanding of the Plaintiff.

115.But simply focusing on my second conclusion for the time being, I find there was insufficient evidence, particularly in the light of the Analysis, to conclude – bearing in mind that the burden of proof lies squarely with the Defendants – that the parties, particularly the Plaintiff, did not intend the legal documentation to have the effect that it prima facie had according to the terms and provisions used in the documents.  In particular, I am not satisfied that there was sufficient evidence to enable me to conclude or find as a fact that the Plaintiff intended to use the legal documentation as a façade or front to conceal or disguise its “real investment” in the two stations (i.e. one that would flout the Mainland restriction).  Not only that, on the evidence before me, I am satisfied that there was sufficient evidence to find positively that the legal documentation was devised and entered into precisely for the opposite reason, i.e. to carry out and implement the Plaintiff’s intended investment in a way that would not infringe Mainland law (save for the relatively minor reservation regarding the enforceability of the option contract and management service agreement as noted above).  That it may have been very close to an infringement is another matter.  That it may not have been successful or wholly successful in not breaching Mainland law is also another matter.  But here, as a matter of intention of the Plaintiff (which masterminded and devised the legal documentation), there was nothing secretive behind the legal documentation.

116.I wish to emphasize that I have come to the above conclusion not only on the basis of the Analysis, but also on the basis of the rest of the evidence, including the fact that quite plainly the Plaintiff obtained both in-house and outside legal advices from the outset and throughout, the evidence of the Plaintiff’s witnesses, the likelihood of a company like the Plaintiff to have wanted to deliberately and secretively breach the law of a foreign country in order to advance its commercial interest, the commercial and business interest and opportunity at stake, and the existence of any other possible means (lawful or unlawful) in order to enable the Plaintiff to achieve what it wanted to achieve.  I have of course not forgotten the contemporaneous documents and correspondence, as well as the evidence adduced by the Defendants’ side. 

117.Chester Chan’s e-mail dated 10 October 1996 is a document that I have given careful consideration to.  I have borne in mind all the points made by Mr Chang based on this contemporaneous e-mail, as well as Chester Chan’s evidence in relation to it.  In particular, I have borne in mind Mr Chang’s argument relating to Chester Chan’s mentioning of the Plaintiff paying 4% interest on the value of the properties to be offered by the 1^st Defendant as securities under the Plaintiff’s then proposal.  I have borne in mind the very general answer from the Plaintiff’s witnesses regarding the same, to the effect that Chester Chan was then dealing with an early version of the Plaintiff’s proposal which was in the course of evolution and in any event the e-mail merely represented Chester Chan’s own perspective.  I must say I have not found the answer or explanation altogether convincing or satisfactory.  But one common ground was that the 1^st Defendant was not aware of the intention of the Plaintiff to pay him 4% interest at all.  And as a matter of fact, that proposal or intention was never carried out.  Rather under the facilities letters, the 1^st Defendant agreed to pay the Plaintiff interest on the loans.  Nonetheless, I have fully and carefully borne in mind Mr Chang’s arguments based on the e-mail.  But quite plainly, the case does not turn on one piece of evidence.  Evidence must be considered in its entirety before any findings can be reached.  As I say, I do not seek to solve or resolve all mysteries and unknowns in this case; that is not my task.  I am here to make findings of fact, insofar as I need to make them, in accordance with the burden and standard of proof.

118.Having considered the evidence as a whole, as I said, I have come to the conclusion that there was nothing sinister or secretive in the matter.  Of course, in order to fully explain my reasoning, I must move on to set out and explain my third conclusion, which cannot be logically and sensibly separate from my present (second) conclusion on the facts.

Third conclusion on the facts

119.As foreshadowed in the preceding discussion, I find on the evidence by way of my third conclusion that the Plaintiff never made any assurances or representations (that carried with them a legal obligation) to the 1^st and 2^nd Defendants that the loans would be non-repayable, whether conditionally or unconditionally.  Quite to the contrary, I conclude and find as a fact that the Plaintiff had in the course of implementation of its intended commercial investment made clear to the 1^st Defendant (and through him the 2^nd Defendant) that strictly and legally speaking, the loans were repayable, although the Plaintiff would in its sole discretion consider waiving repayment of the loans if and when it should see fit to do so.

120.On the present subject, it is necessary to consider the oral evidence of the respective witnesses.  In this regard, unfortunately, I do not find the evidence of the witnesses called by either side entirely satisfactory.  First, I do not find Peggy Wu’s and Chester Chan’s denial of their (including Linda Chan’s) ever having made representations or assurances of any kind to the Plaintiff convincing; I find their evidence in that regard less than truthful.  Secondly, I find the 1^st Defendant’s evidence to the effect that the Plaintiff had definitely represented to and assured him that the loans would be non-repayable, either conditionally or unconditionally – as at different stages he or his counsel has suggested to the Court, equally unreliable and untruthful.

121.On the entirety of the evidence, and in particular the contemporaneous documents, it is quite plain to me that some representations or assurances had been made by the Plaintiff (through its staff) to the 1^st Defendant.  Thus for instance, the reference in the Analysis to the loans being regarded, for the Plaintiff, as non-repayable, cannot have suddenly appeared in the Analysis without some background.  Nor is it possible for the comfort letter, which I have reproduced in full in the earlier part of this judgment, to have come into being for no good reason.  Furthermore, there was the indisputable background that the ultimate aim of the Plaintiff in the intended commercial investment was to become a joint venture partner with Lin Gang in owning and running the stations, which would be accomplished by Po On Easy’s nomination of the Plaintiff as the joint venture partner, with the entailing injection of the loans into the joint venture as the Plaintiff’s capital contribution, thus resulting in the (notional) repayment of the loans by the 1^st and 2^nd Defendants to the Plaintiff, as explained in the Analysis.

122.On the other hand, nothing can be clearer than the wording of the comfort letter which set out or restricted in no uncertain terms the extent or width of the representations or assurances that had been made on behalf of the Plaintiff in favour of the 1^st and 2^nd Defendants, namely that the Plaintiff would give favourable consideration, at its sole discretion, to discharging the loans of the 1^st and 2^nd Defendants.

123.During final submission, in response to the Court’s specific query, Mr Chang on behalf of his clients agreed and accepted, no doubt rightly so in my view, that it was open to the Court to find, despite the denial by the Plaintiff’s witnesses of having made any representations or assurances at all, that whatever oral representations or assurances that the Plaintiff’s staff may have made to the Defendants regarding the true nature of the arrangement entered into between the parties were not intended to create any legally binding obligation or relationship.  Mr Chang accepted that indeed it constituted part of his clients’ case to establish the reverse, i.e. that those oral representations or assurances were uttered with the intention, understood by both sides, that they would create legally binding obligations or relationships.  In those circumstances, no pleading difficulty arose, and it was for the Defendants to establish their allegations. 

124.Returning to the facts, in my judgment, what happened was that the Plaintiff and his staff had explained and represented to the 1^st Defendant what they envisaged would happen – if everything should go smoothly and according to plan, namely that the Mainland should relax its law regarding foreign participation in petrol stations (either following the entry of the Mainland to WTO or otherwise), failing which, the legal structure (which was intended to be an interim measure pending the lawful formation of the joint venture) should be allowed to run its course of 30 years up to the year 2026.  In either of those scenarios, provided that the 1^st Defendant should follow all instructions of the Plaintiff in relation to the construction and development of the two stations and the operation of the same after their completion, the Plaintiff would, in the normal course of events, waive the loans in favour of the 1^st Defendant. 

125.Pausing here, Mr Chang said in final submission that there was no commercial reason why the Plaintiff should have wanted to do so (i.e. waiving the loans).  It is not for the Plaintiff or for this Court to supply the reason(s).  The 1^st and 2^nd Defendants bear the burden of proof.  It is for Mr Chang to persuade this Court that there was no possible good commercial reasons for the Plaintiff to consider waiving the loans.  As I said in the course of Mr Chang’s final submission, I could easily think of several good commercial reasons for the Plaintiff to consider waiving the loans in favour of the 1^st Defendant should everything have gone smoothly and according to plan, or to make representations to such effect to him.

126.I stress again that it is not for the Plaintiff or for this Court to supply the reason.  But with that caveat in mind, I think a very obvious reason, on the evidence of this case, for the Plaintiff to have wanted to consider waiving the loans or to have told the 1^st Defendant so in the circumstances described above was to provide the necessary incentive to the 1^st Defendant to agree to enter into the plan and play the role of a borrower and dealer in the first place.  This ties in well and indeed answers the point raised by Mr Chang in argument that the plan as represented by the legal documentation, though workable in theory, was insufficiently attractive and thus unworkable in practice for want of sufficient incentive to people like the 1^st Defendant or the 3^rd Defendant who had to borrow substantial sums from the Plaintiff to invest in the petrol stations in Shenzhen in return for a dealership.  In my judgment, on the evidence of the present case, the requisite incentive was to be found in the promise, representation or assurance that the Plaintiff gave the 1^st Defendant, i.e. that the Plaintiff would give favourable consideration, at its sole discretion, to waiving the loans.

127.However, on the evidence, I also find that a “favourable consideration” was the limit or extent of the Plaintiff’s promises, assurances or representations.  And the important words were “at [the Plaintiff’s] discretion” (the comfort letter).  In other words, whilst the Plaintiff had represented to the 1^st Defendant the most likely scenario, in the ordinary course of events, i.e. that the Plaintiff’s waiving the loans, it had also very carefully and clearly made clear to the 1^st Defendant that it was a matter of discretion solely in the hands of the Plaintiff and there was no “legally binding obligation” on the part of the Plaintiff to so waive the loans.

128.That this was a sufficient incentive to the 1^st Defendant, despite its inherent uncertainty (i.e. that the waiving of the loans would be at the sole discretion of the Plaintiff) was, in my judgment, most likely due to the very close relationship that the 1^st Defendant then had with the Plaintiff.  In my judgment, to the mind of the 1^st Defendant, there was no reason why the Plaintiff should have wanted or wished to exercise its discretion in any way other than waiving the loans, in favour of a faithful and obedient dealer like himself.  To him, that was, in my judgment and I so find, sufficient incentive and protection of his own interest. 

129.On the other hand, once one thinks as the 1^st Defendant did at the material time (i.e. that for all practical purposes, the Plaintiff would exercise its discretion to waive the loans), the attraction of the whole deal to the 1^st Defendant would not be difficult to imagine, and from all accounts (according to the evidence), but for some unforeseeable difficulties with the Bei Huan station (due to the illegal sale of petroleum in other stations near Dongguan) and the subsequent change of State policy in mid-1999, the dealership of the two stations in question would have been a very profitable one.  Here I need only refer to the enthusiasm displayed by the 1^st Defendant in finding a partner with the necessary security to offer to the Plaintiff to jointly run the Song Gang station, when the opportunity arose in 1997, along the same lines as the two earlier stations, and the extent he was prepared to go to persuade the 3^rd Defendant to enter into the deal (by advancing to her cash in the sum of HK$1 million in order to help the latter discharge her pre-existing mortgage), to illustrate how attractive an additional dealership in the Song Gang station was perceived to be by the 1^st Defendant.  In the 1^st Defendant’s own words, he had complete trust and confidence in the Plaintiff. 

130.The 1^st Defendant’s trust and confidence in the Plaintiff and his confident expectation that the Plaintiff would exercise its discretion to waive the loans in future explained well why on the evidence, everything was dictated by the Plaintiff, with little input or bargain from the 1^st Defendant.  Mr Chang used all this in his final submission to ask this Court to infer that a binding promise that the loans would not be repayable and the mortgages enforced must have been made.  I can follow Mr Chang’s contention fully, but the logic of his contention could also support the scenario in which the 1^st Defendant confidently expected the Plaintiff to exercise its discretion to waive the loans, although strictly speaking, as the comfort letter had emphasised, there was no legal obligation on the part of the Plaintiff so to do.

131.On the evidence, I find that the Plaintiff did not take undue advantage of that trust and confidence.  For as I have found, the Plaintiff did make it very clear to the 1^st Defendant in the comfort letter that everything else notwithstanding, strictly and legally speaking, all that the Plaintiff was promising was a favourable consideration of a waiver of the loans, at the sole discretion of the Plaintiff, and there was no binding legal obligation on the part of the Plaintiff to waive the loans.

132.Whilst on the question of whether there was sufficient incentive for somebody like the 1^st Defendant to enter into the arrangement in question, I should add that there was no direct evidence and indeed very little material on what sort of profit the parties, particularly the 1^st Defendant, were expecting to generate from the operation of the stations in question. 

133.Of course, the burden lies with the 1^st Defendant to convince this Court that there was no or insufficient incentive for the 1^st Defendant to enter into the arrangement without the alleged oral assurances from the Plaintiff that the loans would not be repayable. 

134.Significantly, no evidence was led from the 1^st Defendant on the question of estimated profit.  I cannot conclude from the evidence that the 1^st Defendant had made no such estimate of profit at all, as Mr Chang during final submission has sought to suggest.  There was simply no evidence on whether such an estimate had been made by the 1^st Defendant, and what his estimate, if any, was.  In any event, Mr Chang’s point on the lack of sufficient incentive lost much of its force once one comes to the conclusion as I did that the 1^st Defendant confidently expected the Plaintiff to exercise its discretion to waive the loans.  As I have said, that explains the willingness of the 1^st Defendant to enter into the arrangement and his conduct. 

135.Of course, it is not for the Court to speculate, nor was it incumbent upon the Plaintiff to prove a positive case, on the incentive that moved the 1^st Defendant (or the 3^rd Defendant) to agree to participate in the investment plan devised by the Plaintiff.  During the course of trial, the possibility of the 1^st Defendant “kicking out” the Plaintiff from the stations and selling his or Po On Easy’s interest in the stations to a third party was mentioned.  I do not need to go as far as Peggy Wu did to suggest that it was the 1^st Defendant who of his own volition and ambition entered into the deposit agreement with Lin Gang prior to approval of the Plaintiff.  The documents would seem to suggest otherwise. 

136.However, I do not exclude the existence of certain ambitions or secret agenda on the part of the 1^st Defendant in relation to the stations, if everything should turn out to work smoothly, as a possibility.  As I emphasised, it is for Mr Chang’s clients to persuade the Court by evidence that there was insufficient incentive for them to enter into the arrangement with the Plaintiff if the Plaintiff had not made the oral assurances as they have alleged.  In this regard, I have not forgotten for example that in fact in 2000, Po On Easy and Qiu successfully bought the entire interest of Lin Gang in these stations from Lin Gang, and Qiu actually became the person managing and running Lin Gang prior to the eventual termination of all relationships with the Plaintiff.  Thus as I said, one simply cannot tell what the 1^st Defendant/Po On Easy/Qiu could or would do, or were capable of doing, if everything should have gone smoothly, or say whether there was or was not sufficient incentive for the 1^st Defendant to have agreed to enter into the investment plan as devised by the Plaintiff, in the absence of a concrete and legally binding promise that the loans would be waived.  In short, Mr Chang has laid insufficient evidential foundation to support his argument. 

137.It seems to me that at the end of the day, what was involved was a question of taking commercial risks.  From the angle of the 1^st Defendant, whilst he had been told, as per my finding, in no uncertain terms that there was no absolute guarantee that the Plaintiff would waive the loans, yet he was so confident about his relationship with the Plaintiff that he found the upside of participating in the intended investment of the Plaintiff as its borrower/dealer to far outweigh the downside and possible risk of the Plaintiff not exercising its discretion to waive the loans.  His behaviour throughout should be explained, in my view, by reference to that confidence of his, rather than any definite oral assurance or representation by the Plaintiff that the loans would not be repayable, conditionally or otherwise.

138.On the other hand, from the angle of the Plaintiff, it was also a question of taking commercial risks.  For it must not be forgotten that under the legal documentation, which according to my finding constituted the entire mechanism by which the Plaintiff was to carry out its intended commercial investment, the Plaintiff had no right to the formation of a joint venture even if the law in the Mainland should be relaxed as had been hoped for, and it was really up to the 1^st Defendant/Po On Easy/Qiu to decide whether to nominate the Plaintiff to be the joint venture partner.  Furthermore, in the alternative scenario that no joint venture should be allowed to be formed for the 30 years period, there was always the risk, at least in theory, that the 1^st Defendant should somehow obtain alternative financing and support, not only to pay off the loans, but also to, as has been put during the trial, “kick-out” the Plaintiff from the stations in question – the remedy of the Plaintiff in that event presumably would only sound in damages.  However, as I said, it was again a matter of taking commercial risks.  In my judgment, on the facts, the Plaintiff was equally confident that nothing of that sort would happen, given its relationship with the 1^st Defendant.  In other words, the trust and confidence between the two sides was mutual. 

139.As has been discussed extensively during submissions by counsel, the loans actually served as a sort of “trump-card” in the scheme of things, whereby the Plaintiff could ensure the 1^st Defendant’s compliance of the Plaintiff’s instructions regarding the development and operation of these stations.

140.As to why in its legal structure devised to carry out the intended commercial investment the Plaintiff should leave such a lacuna, in terms of a binding obligation on the part of Po On Easy/Qiu/the 1^st Defendant to nominate the Plaintiff to be the joint venture partner and correspondingly why the waiving of the loans in favour of the 1^st Defendant should be a matter of discretion on the part of the Plaintiff rather than an accrued right (provided that the 1^st Defendant should have followed all instructions of the Plaintiff), there was no direct or satisfactory evidence.  By so saying, I should make it clear that I am far from convinced by Peggy Wu’s evidence that the Plaintiff was merely buying a “dream” or “hope” out of the whole transaction (i.e. that one day the Plaintiff would be nominated a joint venture partner).  Rather the Analysis, in my judgment, was nearer the truth when it said (from the Plaintiff’s point of view – of course) that the 1^st Defendant “would procure” Po On Easy to form a joint venture with Lin Gang and assign the interest in the joint venture to the Plaintiff at no premium.

141.But still that does not answer the question I posed in the preceding paragraph.  Again I should emphasize that it is not for the Plaintiff or this Court to provide an answer to every question or doubt, although all relevant questions and doubts must be, and indeed have been, taken into account in the Court’s assessment of the evidence and making of the relevant findings of fact, based on the applicable burden and standard of proof.  In the present case, it is for the Defendants to establish and prove the oral assurances.

142.That said, on the evidence, I find it most likely to have been the case that the Plaintiff considered that an outright legal promise on the part of the 1^st Defendant/Po On Easy/Qiu to nominate the Plaintiff as the joint venture partner could be so dangerously close to rendering the Plaintiff an “investor” of the stations in the sense prohibited by Mainland law, that it was thought neither desirable nor necessary to so structure the legal documentation.  Likewise, an outright and legally binding promise on the part of the Plaintiff to the 1^st Defendant that the loans would be non-repayable would render the whole structure precariously near to the Plaintiff “investing” in the stations via the 1^st Defendant/Po On Easy/Qiu as mere paying agent in infringement of the relevant Mainland regulation, which the Plaintiff had sought so hard to avoid in the first place, that it was felt unsafe to so structure the legal documentation.  Thus, far from there being any preconceived plan to conceal any under-table agreement or understanding between the parties, most likely what happened was that it was in fact part and partial of the whole plan that the waiver of the loan should be left at the level of a non-legally binding and discretionary decision on the part of the Plaintiff.

143.I should however emphasize that the above only represents my observations from the evidence.  There was no direct evidence to that effect.  Peggy Wu’s evidence did not go that far and did not precisely tally with what has been suggested above.  My various conclusions, particularly the current one, do not stand or fall together with my above observations.  My above observations only feature as one of the many possibilities that I have taken into account in reaching my factual findings and conclusions.  As I have repeatedly emphasised, the burden of proof lies with the Defendants, and neither the Plaintiff nor this Court has the duty to supply any definite answer to a question like the one that I have posed above. 

144.In my judgment, what I said above adequately explains the genesis of the comfort letter which set out the position of the Plaintiff in no uncertain terms.  The document was signed not only by Peggy Wu but also by the 1^st Defendant (on behalf of himself and his wife).  Furthermore, the Plaintiff took great care to prepare a Chinese translation of the comfort letter which was given to the 1^st Defendant at the same time as the original English one.  On the entirety of the evidence before me, I am unable to accept the 1^st Defendant’s evidence and explanation relating to the wording of the comfort letter and his signing of the same.  In this regard, I very much prefer the evidence of Peggy Wu and Barry Li.

145.The comfort letter covered the loans under the first two facilities letters, but was only issued in the context of the Fumin Road DLA.  But it was common ground that the respective arrangements in relation to the Bei Huan Road station and Song Gang station followed that of Fumin station.  There can be no arguable dispute that the comfort letter, or more correctly the stand of the Plaintiff towards repayment of the loans under the facilities letters, as reflected in the comfort letter regarding the Fumin station, was the same in relation to all three stations and all three facilities letters.

146.The fact that the Plaintiff was prepared to and did absorb the extra construction costs of the Fumin and Bei Huan stations and the renovation costs of the Song Gang station respectively, that went beyond the respective loans made under the 3 facilities letters, is not inconsistent with my conclusion.  Under the arrangement, devised or decided by the Plaintiff, and agreed to by the 1^st and 3^rd Defendants, the Defendants were only required to borrow the loans under the 3 facilities letters in order to develop or renovate these stations, so as to enable them to operate the same as dealers, and so for any non-budgeted or extra costs and expenses, it would not be at all surprising that they should be absorbed by the Plaintiff. 

147.It is true that in evidence, both the 1^st and 3^rd Defendants (as well as the 2^nd Defendant) said that if they had known that the loans under the facilities letters would be repayable and the mortgages would be enforced to secure their repayment, or if they had known that these stations were not the Plaintiff’s “investments”, they would not have agreed to enter into the transactions at all.  I have given what they claimed in evidence due weight in assessing the entire evidence.  However, I must guard against the possibility of the Defendants making self-serving statements in evidence in their attempts to defeat the Plaintiff’s case.

148.In fact, apart from the comfort letter, which to a substantial extent was quite fatal to the 1^st Defendant’s case of oral assurances, there were other contemporaneous indications.  Thus, Peggy Wu’s e-mail dated 20 January 1997 to the 1^st Defendant urging the latter to read carefully the draft Services Management Contract, the Loan Contract and the First Option Contract to be executed by Po On Easy/Qiu with Lin Gang because once executed, the 1^st Defendant/Po On Easy/Qiu would assume legal obligations thereunder, would tend to suggest that the 1^st Defendant was not a mere puppet or pawn of the Plaintiff in its investment plan, without any legal rights or obligations.

149.Furthermore, despite the conflict in oral evidence, Peggy Wu’s fax dated 4 November 1996 to Chris Keong reporting to him, amongst other things, that she had on the previous day “explicitly explained what [the 1^st Defendant’s] risk [was] with [the Plaintiff’s] current proposal” clearly contradicted the 1^st Defendant’s denial in evidence that he was never warned of any risk under the Plaintiff’s plan at the car race.  Furthermore, despite Mr Chang’s eloquent submission to the contrary, I am persuaded that a more natural reading of Peggy Wu’s fax as a whole would suggest that there was indeed risk to be assumed by the 1^st Defendant under the Plaintiff’s proposal, and thus the warning.  That again goes towards contradicting the case of the 1^st Defendant that his role was merely that of a paying agent in relation to the loans, which by definition (and coupled with the alleged oral assurances) would and should have involved no risk to him whatsoever. 

150.I have not forgotten, of course, counsel’s submission and detailed analysis of the respective evidence of Peggy Wu and the 1^st Defendant in relation to the alleged warning in question, the reason for the 1^st Defendant’s signing of the deposit agreement which led to the making of the warning, and what had happened during the meeting or series of meetings at Shenzhen Shangri-La in mid-October 1996.  In short, I find the evidence and explanation of Peggy Wu on the above topics far from satisfactory; however, this does not alter the fact that according to the contemporaneous fax written by Peggy Wu on 4 November, she did on the previous day explain explicitly the risk to be assumed by the 1^st Defendant under the Plaintiff’s then proposal to the 1^st Defendant.

151.The significance of the warning mentioned in the e-mail of Peggy Wu dated 4 November 1996 lies not only in that it contradicted the denial by the 1^st Defendant of his having been given any warning on 3 November 1996 by Peggy Wu when the two met in the car race, but also that the Plaintiff and Peggy Wu thought that under the then proposal of the Plaintiff, there was some risk to warn the 1^st Defendant about – this goes toward contradicting the 1^st Defendant’s case that he was merely a paying agent under the proposal of the Plaintiff, and his only substantive involvement would be as a dealer and operator of the two stations after their construction – the business risk of which would, on the evidence before me as a whole, hardly warrant a specific warning from the Plaintiff.  

152.I find the 1^st Defendant’s case in relation to the assistance that he had obtained from his lawyer friend most ambiguous.  I do not believe that he has told the Court the entire truth about the participation of his lawyer friend and the assistance that he had obtained from him, who entered the scene at around the time when the DLA for Fumin Road was negotiated and when the comfort letter was signed.  In comparison, I prefer and accept the account of Barry Li in relation to the negotiations of the terms of the DLA and the genesis of the comfort letter.  In particular, I am most sceptical about the 1^st Defendant’s explanation for his willingness to accept the comfort letter despite the fact that he had, as per his own evidence, noticed that the wording of the comfort letter differed from what he had been orally assured, particularly against the background that he had access to the advice of his lawyer friend.  I would have expected the lawyer friend to warn the 1^st Defendant of the risk involved in getting a comfort letter that did not really reflect what had been orally represented to the 1^st Defendant (as per his story).  Despite the 1^st Defendant’s denial, there was quite obviously some input by his lawyer friend during the negotiation of the terms of the DLA in mid-1997: see for instance the internal note of Barry Li dated 27 May 1997.  The lawyer friend was not called to give evidence and no explanation for not calling him was proffered by the 1^st and 2^nd Defendants at trial

153.As regards the 1^st Defendant’s allegation and evidence in relation to the oral assurances, I must say I was not impressed by his demeanour in Court, at least as regards this part of his evidence.  Although both the pleadings and the 1^st affirmation of the 1^st Defendant referred to the making of these oral assurances by Peggy Wu and Chester Chan to him, no particulars or details regarding the occasions when the alleged oral assurances were made were supplied.  During cross-examination of Peggy Wu and Chester Chan, although the general case of the 1^st Defendant on oral assurances was put to them (which was denied respectively by the witnesses), no specific occasions or particulars were suggested or put.  When Mr Chang opened his case, he referred to no particular occasion.  When queried by this Court, counsel told the Court (no doubt in accordance with his then instructions) that no particular day(s) or occasion(s) when the alleged assurances were made could be pinpointed by the 1^st Defendant or would be mentioned by the 1^st Defendant in the evidence that he was going to give (transcript, p. 326A to O). 

154.Yet when the 1^st Defendant gave evidence, quite contrary to what his counsel had represented to the Court, he was quite able to pinpoint two different occasions when he was orally assured by Chester Chan and Peggy Wu respectively that the loans were not repayable (or told words to that effect), i.e. during the meeting at the Shangri-La in Shenzhen in mid October 1996 (by Peggy Wu) and on an occasion earlier than the hotel meeting (by Chester Chan): see for instance, his evidence during cross-examination (transcript, pp. 400L to 404N). 

155.To be fair to counsel, no such evidence was led by him from the 1^st Defendant during examination-in-chief.  Having given due allowance to any possible difference in the understanding of what was meant by an occasion or the particulars of the same when the oral assurances were allegedly made to the 1^st Defendant, it is quite plain to me that what the 1^st Defendant revealed during cross-examination was something quite new not only to the Plaintiff (and the Court), but also to his own counsel up to that stage.  There might be innocent reasons for this – although none has been suggested, but I must bear what has actually happened carefully in mind in evaluating the 1^st Defendant’s evidence.

156.Of course, the 1^st Defendant’s evidence by itself is not determinative of the issue in question.  I have not forgotten the evidence of the 2^nd Defendant – which is not of much assistance given her extremely minor involvement.  Nor have I forgotten the contrary evidence of Peggy Wu and Chester Chan who denied ever having made any such oral assurances to the 1^st Defendant.  However, as no specific occasion and no particulars of the occasion were ever put to them during cross-examination, their respective denials were understandably general in nature.  I will, in a later section of this judgment, deal with the case of the 3^rd Defendant specifically.  But of course, in reaching my third conclusion here, I have fully taken into account the 3^rd Defendant’s evidence (which supported the 1^st and 2^nd Defendants’ case) and what I will say later in relation to her case and evidence.

157.And of course apart from the oral evidence of the respective witnesses on this issue, I have also borne in mind, as I have repeatedly emphasised, the rest of the entire evidence before me, before reaching my third conclusion on the facts.

158.I wish to emphasize again that I do not come to my third conclusion and finding by reason of one or two pieces of document or events, although I have singled out the comfort letter and some other matters in the judgment above to explain my conclusion.  I base my finding on the entirety of the evidence, including the oral evidence of the respective witnesses.  As I said, essentially, in my third conclusion, I reject the 1^st and 2^nd Defendants’ case on oral assurances.  I am not satisfied that they have proven their case on the entirety of the evidence. 

159.My third conclusion (as combined with my first conclusion) explains why the 1^st Defendant has represented to others that the stations were the investments of the Plaintiff, and that the loans were not repayable.  In short, he was confident about the exercise of the Plaintiff’s discretion in his favour, and perhaps with the benefit of hindsight, he was over confident.  Although I need not make any finding here, I would indicate that on the entire evidence, what likely happened was that due to the change in policy in the Mainland, and the merger of Mobil with Exxon and the resulting change of personnel in the Plaintiff, there was simply a change of policy and a change in perception in relation to the Plaintiff’s commercial investment in the stations as represented by the legal documentation, and the discretion of the Plaintiff was thus exercised in a way totally unforeseen by the 1^st Defendant.  In a sense, all this was quite unfortunate, but the 1^st and 2^nd Defendants’ position must be governed and judged solely by reference to law and established legal relationships, rather than confidence or expectation (that did not amount to something with legal effect). 

160.As regards the execution of the various documents and the Defendants’ point that they had not been thoroughly interpreted or explained to them, the short answer is that there was no duty whatsoever on the part of the Plaintiff or its lawyers to explain anything to the Defendants, so long as no misrepresentation about the documents had been made – on the facts, I reject any such suggestion.

Provisional conclusion on the 1^st and 2^nd Defendants’ case

161.It must be patent from the above factual conclusions and findings that the 1^st Defendant’s case cannot survive those findings.  Nor can his wife’s case survives those findings.  I say this subject to one caveat, i.e. the question of illegality, which I will turn to in due course.  That would leave the position of the 3^rd and 4^th Defendants which I should deal with in greater detail, although many of the things that I have said and found above apply equally to the case of the 3^rd and 4^th Defendants.

Further consideration of the 3^rd and 4^th Defendants’ case

162.I now turn to deal with specifically the case and allegations of the 3^rd Defendant.  According to the defence filed by her and the defence filed by the 4^th Defendant (of which she was a director and shareholder), which were identical in contents – no doubt the defence was drafted by lawyers acting for the 4^th Defendant on the instructions of the 3^rd Defendant, various misrepresentations were made by Chester Chan to her, which induced her (and the 4^th Defendant) to enter into the 3^rd facilities letter and the 3^rd mortgage.  (She also alleged that various misrepresentations were made by the 1^st Defendant to her, as agent for the Plaintiff.)  As regards the misrepresentations alleged to have been made by Chester Chan to her, they were pleaded as follows:

“

(iii)

In or about September 1997, the 1st Defendant arranged for the 3rd Defendant to see a representative of the Plaintiff called Chan Ka Yu Chester.  At the meeting, the said Chan Ka Yu Chester said to the 3rd Defendant, inter alia, the Plaintiff did not have a licence to operate Petrol Filling Station in the Mainland, and that the Plaintiff would have to pay a licence fee to a Company called Lin Gang in order to control a Petrol Filling Station through using Lin Guang’s licence.  Chan Ka Yu Chester further assured the 3rd Defendant that the Plaintiff would ensure that the 3rd Defendant would not suffer loss and further, the title deeds of the 1st Property would be returned once China entered into the World Trade Organization or the Plaintiff was able to hold a licence operating Petrol Filling Station.  The said Chan Ka Yu also confirmed the Plaintiff would be the true owner of the Song Kong Petrol Filling Station and the deposit of the title deeds of the 1st Property was to prevent the 3rd Defendant from selling the Station.”

163.In her affirmation, the 3^rd Defendant made the same allegations (paragraph 9).

164.Yet, as mentioned above, when she gave oral evidence at trial, she went much further in her allegations against Chester Chan: she said that Chester Chan told her, pursuant to her queries, that neither the principal nor interest of the loan would be repayable, and that in truth, the Plaintiff was buying the Song Gang station from the Mainland seller, and her role was to pass on a sum of money to be given to her (and the 1^st Defendant) by the Plaintiff to the seller of the station in payment of the price for the acquisition of the station.

165.This latter version was not put to either Peggy Wu or Chester Chan during cross-examination, despite the Court’s express reminder to the 3^rd Defendant of the need to do so (see transcript, pp. 113G to 114F; 187R to 189V).

166.Toward the end of Mr Ng’s final submission, the question arose as to whether the 3^rd Defendant was entitled to rely on what she had said during evidence (but had failed to plead in her defence) in support of her defence against the Plaintiff’s claim based on the 3^rd facilities letter, and this developed into an application for leave to amend the defence, which was heard by me on the last day of the trial – the 18^th day.  Essentially on the grounds of prejudice and lateness, particularly the fact that the latest allegations of the 3^rd Defendant were never put to Peggy Wu and Chester Chan, Mr Ng on behalf of the Plaintiff strenuously opposed the application to amend.  I reserved my decision.

167.Having given the matter careful consideration, I have come to the conclusion that the application to amend is academic, for the short reason that I am not satisfied, on a balance of probabilities (the burden being on the 3^rd Defendant), that the 3^rd Defendant’s assertions were true.  For the sake of completeness, however, I should indicate that if a decision were required, I would have, on balance and in the exercise of my discretion, refused the application, basically on those grounds that had been advanced by Mr Ng on the last day of the trial. 

168.I have already set out above the evolution of the 3^rd Defendant’s case on the alleged misrepresentations made by Chester Chan to her.  Not only were they highly relevant to the 3^rd Defendant’s last minute application to amend her pleading, they were also material to my assessment of her credibility in relation to this part of her evidence. 

169.During cross-examination, the 3^rd Defendant explained that at the time when she gave instructions to the lawyers for the preparation of the 4^th Defendant’s defence, which she copied as her own defence (she have been acting in person throughout despite the fact that at an earlier stage, the 4^th Defendant was represented by solicitors), she was under great pressure due to the collapse of the Song Gang station and the resulting litigations, and she simply missed out this part of the facts in her instructions (transcript, pp. 542J to 543A).  I have carefully borne her explanation in mind.

170.During trial, and in particular during her evidence and her cross-examination of the witnesses of the other side, the 3^rd Defendant displayed a remarkable memory in the sense that she was, or purported to be, able to recall almost word by word, sentence by sentence, details of her various conversations with people like Chester Chan, Peggy Wu and the 1^st Defendant.  I bear in mind that the Song Gang investment was an important one to her and she must have got some good reasons to have a good recollection of the more important events, particularly given the fact that difficulty and trouble first arose at a time when her recollection of the material events was still fresh.  I have given due allowance for that.

171.I also bear in mind Mr Ng’s general criticisms of the 3^rd Defendant’s evidence, like her less than complete answers regarding her assets, her work and her investment experience during her examination in chief. 

172.On the other hand, I bear in mind that the 3^rd Defendant was a novice in petrol stations and her joint investment with the 1^st Defendant in the Song Gang station amounted to almost $8 million in capital investment (as per the Plaintiff’s case).  Furthermore, her liability under the documents signed was not restricted to the money borrowed in relation to the Song Gang station or the monies payable in respect of that station, but extended also to the 1^st Defendant’s liability under his other transactions with the Plaintiff.  In fact, the 3^rd mortgage was executed in order to enable the 1^st Defendant to redeem another mortgage that he had previously caused his father-in-law to execute in favour of the Plaintiff to secure his “indebtedness” to the Plaintiff.  I have borne in mind the obvious points that can be made in favour of the 3^rd Defendant (although as a layman acting in person, these arguments were not raised as such during submission).

173.On the other hand, I also bear in mind that despite the 3^rd Defendant’s lack of experience in petrol stations, and her general background as a whole, even on her own case, she was prepared to drop everything in Hong Kong and go to Shenzhen to work as an operator and dealer of the Song Gang station.  So at least to that extent, the fact that she knew practically nothing about petrol stations was not a sufficient hindrance to her embarking on the new adventure (together with the 1^st Defendant). 

174.HK$8 million is by any standard a substantial investment, but it should be borne in mind, firstly, that the investment was a joint one between the 1^st Defendant and the 3^rd Defendant; secondly, the 3^rd Defendant was not a person without means at all; thirdly, the estimated profits of the dealership as represented to her by the 1^st Defendant; and fourthly, the representation made to her by the 1^st Defendant that the loan would be non-repayable (here, I must say I would not be surprised that given the 1^st Defendant’s trust and confidence in the Plaintiff and his confident expectation that the Plaintiff would, in the exercise of its discretion, waive the loan at the end of the day, he would have simply represented to the 3^rd Defendant (and indeed the 2^nd Defendant, his wife) that the loan was not repayable, or, for all practicable purposes, not repayable). 

175.As regards the last point, this would go some way towards off-setting the improbability of the 3^rd Defendant’s willingness to agree to shoulder under the signed documents not only the liability arising from the Song Gang station, but also the 1^st Defendant’s liability arising out of the other two stations. 

176.Of course, I have not overlooked the fact there was no similar comfort letter in the relation to the 3^rd Defendant.  But in my judgment, the 3^rd Defendant’s perception and understanding of the representations, whatever they may have been, made by the Plaintiff (and in particular Chester Chan) to her regarding the nature of the transaction and her responsibility under it, were most likely coloured materially by what she had been told by the 1^st Defendant about the same and the confidence displayed by the 1^st Defendant in the Plaintiff in general and the anticipated profits that would be generated from the dealership in particular.

177.I have not of course simply focused on the evidence of the 3^rd Defendant.  I have taken into account the case and evidence of the 1^st Defendant, as well as that of the Plaintiff, in evaluating the 3^rd Defendant’s case on misrepresentations.  (Indeed the reverse is also true – I have carefully borne in mind the case and evidence of the 3^rd Defendant in evaluating the assertions of the 1^st Defendant against the Plaintiff.)

178.I have also borne in mind the documentary evidence, the evidence of Mr Liu and Mr Tian (formerly of Lin Gang), the objective circumstances of the case and the common or indisputable background.  I have borne in mind the inherent probabilities and improbabilities of the competing versions.

179.I have not forgotten the fact that due to the way the 3^rd Defendant had pleaded her case and the way she had conducted her cross-examination of Peggy Wu and Chester Chan, the two witnesses did not have a chance to directly respond to the latest allegations of the 3^rd Defendant, and therefore the Court did not have the opportunity of considering those responses, if any, and the demeanour of the witnesses during such cross-examination. 

180.However, it must be remembered that the burden of proof regarding the latest allegations, like the rest of the 3^rd Defendant’s case on misrepresentations, rests squarely on the 3^rd Defendant.  The Plaintiff was not obliged to say anything or call any evidence in relation to the same.  To illustrate my point, even if I were to accede to the latest application to amend on the condition that the Plaintiff be given leave to recall Peggy Wu and Chester Chan to give evidence and be cross-examined on the latest allegations, the Plaintiff would not be under any duty or obligation to do so – although its failure to do so could be made a subject of comment.  But having considered all evidence as a whole, even if the Plaintiffs were to do that in the hypothetical scenario that I have just described, I would still have come to the same conclusion – I am not satisfied on the balance of probabilities, that the 3^rd Defendant has proven her case either as originally pleaded or as asserted in her evidence.  

181.It is quite plain from this judgment that I have not found the evidence of Peggy Wu and Chester Chan to be wholly satisfactory or completely reliable or truthful.  I have borne that specifically in mind in evaluating the evidence before me as a whole and considered the various possible explanations for the way in which they have chosen to give evidence before me.  However, at the end of the day, as I said, the factual findings must be made by reference to the entire evidence, including evidence of all witnesses.  Moreover, those findings must be made by reference to the burden and standard of proof.  Indeed, the same observations may be said about the evidence of the 1^st, 2^nd and 3^rd Defendants.  In particular, in relation to evidence of the 1^st and 3^rd Defendants, likewise, I do not find their evidence to be entirely satisfactory and truthful, and I have indeed rejected or not accepted specifically some parts of their evidence.  But again, I must consider the entire evidence as a whole before making any findings of fact.  But here the important difference is that whereas the Plaintiff’s case is essentially based on the signed documents which speak for themselves, the Defendants’ defences are essentially based on oral assertions, and moreover as explained above, they bear the burden of proof in relation to the crucial issues.  If for whatever reason, they fail to persuade the Court that their versions are more likely than not true, they fail to prove what they assert, and their defences must necessarily collapse to the extent that they are based on their versions of the facts. 

182.As the 3^rd Defendant has been acting in person, I should simply add a footnote here that in this civil trial, the Court does not set out to find out the absolute truth; it only makes findings based on who has the burden to prove a factual assertion.  The party who has the burden of proof has to satisfy the Court on the balance of probabilities – i.e. more probable than not – that his factual assertion is true.  A finding in favour of his assertion simply means that the Court is satisfied that more probable than not the factual assertion that he has made is true.  It does not mean that the Court is absolutely certain that the factual assertion is true, or that there is no reasonable doubt about it.  It is true only in the sense and to the extent of the balance of probabilities.  By the same token, when the Court is not satisfied that a factual assertion is true, it is merely saying that on the balance of probabilities, the factual assertion is not true.  Put another way, the Court is merely saying either that more probable than not, the factual assertion is not true, or, that the respective probabilities of the factual assertion being true and being untrue are equal.  It is not saying that for certain the factual assertion is untrue, nor is it excluding a reasonable possibility that it is true.

183.Translated into the facts of the present case, all that I am saying here is that on the civil burden and standard of proof, I am not satisfied that the 3^rd Defendant’s factual assertions on the misrepresentations made by Chester Chan to her (whether as originally pleaded or as detailed in her oral evidence in Court) are, on the balance of probabilities, true.  I do not and indeed cannot exclude the reasonable possibility that what the 3^rd Defendant has pleaded or has said in Court is true; however, that reasonable possibility, when expressed in percentages, does not, in my judgment, exceed 50%.

184.In those circumstances, the case of the 3^rd Defendant on direct misrepresentations allegedly made by the Plaintiff to her must collapse. 

185.As to her case that the Plaintiff has through the alleged agency of the 1^st Defendant made misrepresentations to her, all I need say is that there simply was no or insufficient material to support a case of agency of the 1^st Defendant.  On the material before me, I reject the suggestion that the 1^st Defendant acted as the actual or apparent agent of the Plaintiff in making whatever representations that he may have made to the 3^rd Defendant, which induced her into signing the 3^rd facilities letter and her company to execute the 3^rd mortgage. 

186.Quite plainly on the facts and evidence, the 3^rd Plaintiff was enlisted by the 1^st Defendant on the initiative of the latter.  It was a private matter between the two Defendants, and the Plaintiff played no more than a background role in the inter relationship between the two Defendants.  That fatally concludes the 3^rd Defendant’s case on indirect misrepresentations (via agency) against the Plaintiff. 

187.The 3^rd Defendant also relies on undue influence.  I do not wish to lengthen this long judgment by a detailed analysis of the law.  I have had an occasion to examine the law in an earlier case of mine – Dao Heng Bank Limited v Ho Yin Yuk [2003] 1 HKLRD 28.  What I said there, like what has been said in all other cases on undue influence that have been decided, must now be read subject to the further clarification of the law by the Court of Final Appeal in the most recent case of Li San Yung v Bank of China (Hong Kong) Ltd, FACV 9/2004 (17/12/2004) paras. 28-41.  I shall not repeat here the general principles of the defence. 

188.In my judgment, the short answer to the 3^rd Defendant’s case on undue influence, given my findings above, is that regardless of what misrepresentations or undue influence the 1^st Defendant may have made to or exerted on the 3^rd Defendant, the Plaintiff, as an innocent third party, is not affected by it.  There was no special relationship between the 1^st and 3^rd Defendants.  The transaction in question was a commercial transaction in the eyes of the Plaintiff.  On the face of it and as a matter of fact, the 3^rd Defendant had a substantial commercial or business interest in and derived material benefit from the 3^rd facilities letter and 3^rd mortgage.  According to my findings, the Plaintiff had no actual knowledge of whatever misrepresentations or undue influence that there may have been made or exerted.  According to the case law on constructive notice (in the undue influence sense), the Plaintiff was not “put on notice”.  Nor did the Plaintiff have any constructive notice (in the conventional sense of the term) of any misrepresentations or undue influence that there may have existed as between the 1^st and the 3^rd Defendants (on which I need make no definite finding).

189.Given the above, subject to the question of illegality, on which the 3^rd Defendant simply adopted the argument of Mr Chang for the 1^st and 2^nd Defendants, the 3^rd Defendant (and likewise her company, the 4^th Defendant which did not take any part of its own at the trial) have no defence to the Plaintiff’s claim; by the same token, their respective counterclaims for rescission of the mortgage and damages for misrepresentation and undue influence must collapse.

Illegality

190.I now turn to the issue of illegality raised by the 1^st and 2^nd Defendants, and adopted by the 3^rd Defendant.  In gist, Mr Chang argued that the Plaintiff’s “investment” in the stations, when viewed globally, infringed the provisions against foreign investment in Mainland petrol stations as set out in the Interim Provisions on Guidance for Foreign Investment (指導外商投資方向暫行規定), which all parties (and their experts) accepted were applicable to the stations in question and had the force of law in the Mainland at all material times.

191.Secondly, Mr Chang argued that regardless of the Plaintiff’s capacity as a foreign “investor”, the entire investment plan as disclosed by the documentation alone (i.e. irrespective of the Defendants’ case on oral assurances) infringed article 22 of the Provisional Procedures for Administration of Product Oil Market (成品油市場管理暫行辦法), which all parties also accepted was applicable and had the force of law in the Mainland at all material times in relation to the stations.  Article 22 prohibited the letting or transfer of the business licence of an approved petrol station operator (like Lin Gang) to any third party (“… 營業證照不得租借、轉讓”).  Mr Chang said that the chengbao arrangement infringed the provisions.  

192.The first argument can be quickly disposed of.  Mr Chang in final submission conceded, and in my view rightly so, that the first argument would collapse on the facts if the Court were to find that the Plaintiff did not directly or indirectly “invest” (in the sense used by Mr Chang) in the stations in question.  As I have indeed found that the Plaintiff did not “invest” in the stations in the sense of the word used by Mr Chang, the factual premise of his first contention is gone, and I need say nothing further about it, save to indicate, for what it may be worth, that if I had been with Mr Chang on the facts, I would have nonetheless prefer the Plaintiff’s Mainland law expert’s evidence and Mr Ng’s arguments on this issue of illegality to that of Mr Chang’s expert and his submissions.  But all this is academic.

193.As regards Mr Chang’s argument based on article 22 of the Provisional Procedures for Administration of Product Oil Market, counsel submitted that the argument is independent of my factual findings.  His point is simply that regardless of the extent of the Plaintiff’s involvement in the whole transaction, the Mainland law prohibited the type of chengbao arrangements found in the present case in relation to these stations.

194.So far as the Mainland experts’ evidence that this Court has received is concerned, “chengbao” is not a term of art.  So far as I can make out from the expert evidence, chengbao simply means subcontracting.  As expected, the Plaintiff’s expert (Mr Bai Tao) said that the arrangement in question, whether properly called a chengbao arrangement or not, did not amount to the “letting” of the business licence of Lin Gang to anybody (be it Po On Easy/Qiu or the Plaintiff), there being no question of a “transfer” of the licence on the facts.  On the other hand, Mr Chang’s expert (Mr Wu Shuang) simply said that a chengbao arrangement was in substance a letting of business licence by Lin Gang to Po On Easy or the Plaintiff to operate the stations.

195.It is noteworthy that in the present case neither expert referred to any legal literature or decided cases in support of their respective constructions of article 22.  Put another way, they simply based their respective views on their own reading of the article.  Indeed it is fair to say that both experts spent relatively little time and attention in their evidence on article 22 and the letting of a business licence. 

196.Again on this issue of illegality, the burden of proof lies with the Defendants.  Neither expert gave me any detailed analysis of their respective views.  Having considered both their written reports as well as oral evidence, I am not satisfied that the present case involved a letting of Lin Gang’s business licence.  It is true that under the legal documentation, Po On Easy (or the Plaintiff) obtained the right to operate the stations for a period of 30 years or pending the formation of the joint venture when hopefully within the course of 30 years, there should be a relaxation of the Mainland law.  But that is, in my view, quite different from the letting of the business licence during the 30 years period.

197.In my judgment, the chengbao arrangement found in the present case falls short of a letting of the business licence in that the licence would remain throughout the 30 years period with Lin Gang, and it was only the operation of the stations, subject to certain residual right of supervision (as pointed out by Mr Ng during his final submission), that was farmed out by Lin Gang to Po On Easy or the Plaintiff.

198.My doubt regarding the validity of the Defendants’ expert’s assertion of an infringement of article 22 is reinforced by the objective fact that none of the Chinese lawyers that were involved in the present case, or the People’s courts and the arbitral body in Beijing that were seised of one part or another of the dispute between the relevant parties, took the view that there was any infringement of article 22, although to be fair, article 22 may not have been in the forefront of their minds or at all when they were faced with the particular part of the dispute between the parties.

199.In short, on balance, I am simply not satisfied by the evidence that there has been a breach of article 22. 

200.In any event, even if I were wrong with that conclusion, the Defendants’ argument based on article 22 would only lead to a very limited success in containing the Plaintiff’s claim against them.  For one must not forget that illegality is not, so far as this Court is concerned, a question in vacuum.  Any infringement of article 22 must be viewed in a proper contractual context.  Under common law, as Mr Ng has succinctly submitted, a contract, governed by Hong Kong law, is unenforceable for illegality insofar as it requires an act to be performed in a foreign country where the act in question is illegal under the law of that country: Ralli Brothers v. Compania Naviera Sota Y Aznar [1920] 2 KB 287, 304; Kleinwort, Sons and Company v. Ungarische Baumwolle [1939] 2 KB 678, 687, 693-4, 696-7; Regazzoni v. KC Sethia (1944) Ltd [1958] AC 301, 304; Dicey & Morris, The Conflict of Laws (13^th ed), vol. 2, paras. 32-141 to 32-142.  As regards a contract governed by foreign law, it is unenforceable in a local court for illegality to the extent that the contract is illegal under that foreign law: Kahler v. Midland Bank Limited [1950] AC 24, 28-29, 35-36.  Mr Chang did not dispute these propositions of law.

201.Mr Ng argued that so far as his client’s claim based on the facilities letters and mortgages are concerned, Hong Kong law is the applicable law and performance is in Hong Kong.  There is no question of any infringement of article 22.  I agree.

202.As regards the Plaintiff’s claim based on the DLAs, the contracts are governed by Hong Kong law.  So far as the DLAs require the 1^st Defendant to pay the Plaintiff dealer’s licence fees, Mr Ng argued that the payment obligation is to be performed in Hong Kong and any illegality by reason of article 22 is irrelevant.  I disagree (on the assumption that article 22 had been breached).  On the facts, it is quite plain that all parties knew that the licence fees were to come from the turnovers of the operation of the stations in the Mainland.  If the operation of the stations in the Mainland was in breach of article 22, then according to the authority of Regazzoni, supra, a Hong Kong court should not enforce the payment obligation, even though it is to be performed in Hong Kong.

203.However, that is the extent of my disagreement with Mr Ng’s submission.  As to the payment obligation under the DLAs regarding the monies due and payable under the Equipment to Loan Contract and SML Contract, there is no question of any infringement of article 22.

204.As regards the obligation to repay the schedule 7 commissions under the DLAs, again I agree with Mr Ng that any possible infringement of article 22 would not affect the payment obligation which is to be preformed in Hong Kong.  Ex hypothesi, article 22 prohibited the chengbao arrangement – the operation of the stations by Po On Easy (or the Plaintiff) and the payment of any chengbao fee by Po On Easy (or the Plaintiff) to Lin Gang.  Article 22 cannot have any prohibitory effect on Po On Easy/Qiu/the 1^st Defendant’s repayment of the chengbao fee to the Plaintiff, which ought not to have been paid in the first place.  Nor is one concerned with the repayment of the chengbao fee by Lin Gang, as opposed to Po On Easy/Qiu/the 1^st Defendant, to the Plaintiff.  In my judgment, the illegality, if any, is quite irrelevant so far as repayment of the schedule 7 commissions by the 1^st Defendant to the Plaintiff is concerned.

205.In short, even if I were wrong and article 22 had been infringed in the present case, the only claim of the Plaintiff that would be affected and rendered unenforceable would be the Plaintiff’s claim for payment of the dealer’s licence fees under the two DLAs.  However, as I am not satisfied on the evidence before me that article 22 has indeed been infringed, the Plaintiff’s claim against the Defendants is not affected at all.

Res judicata

206.For the sake of completeness, I should also record that the Plaintiff also relied on the doctrine of res judicata in response to the 1^st Defendant’s contention that the Plaintiff was the real “investor” of the stations.  As I have rejected the 1^st Defendant’s case on the facts, the Plaintiff’s argument based on res judicata is academic. 

207.For what it may be worth, I would simply indicate that I am not with the Plaintiff.  In summary, in my view (based on the expert evidence that I accept) the 1^st Defendant was a mere third party in the Shenzhen proceedings, “without an independent right of claim” under the Mainland civil procedure.  No judgment on liability was entered by the People’s Court against the 1^st Defendant as third party.  In those circumstances, the 1^st Defendant as third party did not enjoy the right of a “party” (i.e. a plaintiff or defendant) under the civil litigation in question (article 56 of the Civil Procedure Law) and in particular he had no right to appeal or to ask for a re-trial.  Had he had the right of a party, he could have commenced a new action against Mobil in the Mainland, which according to the Civil Procedure Law, would be regarded as an application for a re-trial under the supervisory system provided under Chapter 16 of the Civil Procedure Law: see article 111(5). 

208.The 1^st Defendant was a third party “without an independent right of claim” according to the law of civil procedure in the Mainland because his case was, in substance, the same as the case of Po On Easy which was the plaintiff in the Mainland proceedings against Mobil as defendant in those proceedings.  In this regard, I reject Mr Wu’s expert evidence to the contrary. 

209.Quite plainly, on a proper reading of the respective stances of Po On Easy and the 1^st Defendant in the Mainland proceedings, they were essentially the same: i.e. the stations were in substance and in truth the “investment” of Mobil, and so far as investment was concerned, the 1^st Defendant was a mere paying agent – the contention was, in my reading of the People’s Courts’ judgments, rejected by those courts on the evidence before the same.

210.As the 1^st Defendant was a mere third party without an independent right of claim under the Mainland proceedings, he was not regarded as a “party” to the proceedings between Po On Easy and Mobil, and he was therefore quite free under the Civil Procedure Law to commence a new action as plaintiff in the People’s Court against Mobil as defendant, raising the same issue regarding investment and his role as a mere agent.  His claim would not be regarded as a claim for a re-trial under the supervisory system in Chapter 16 of the Civil Procedure Law.  Rather, according to the expert evidence that I accept, the People’s Court would entertain his claim as a new action.  That his claim would be unlikely to succeed unless he could produce further or other evidence is neither here nor there.  The important thing is that as a matter of civil procedure law, his claim would not be dismissed without a consideration on the merit by the People’s Court on the ground that the same issue had already been raised by him as third party in the proceedings between Lin Gang and Mobil. 

211.As the expert for the 1^st and 2^nd Defendants pointed out, to do otherwise would be wholly unfair to the 1^st Defendant for he had no right of appeal or review under the original litigation between Lin Gang and Mobil, given that he was merely a third party without an independent right of claim and given that no judgment under that litigation was eventually entered against him.

212.In those circumstances, regardless of the vexed question of whether Mainland judgments are in general not final and conclusive, in the eyes of the local law, for recognition and enforcement purposes and for the operation of the doctrine of res judicata, the Plaintiff’s case of res judicata based on the People’s Courts’ judgments simply does not get off the ground.  The judgments, in my view, were not final and conclusive against the 1^st Defendant even under the general civil procedure law in the Mainland, leaving aside the complication of the protest system which forms part of the supervisory system under Chapter 16 of the Civil Procedure Law.

213.In short, I reject the Plaintiff’s argument.  But that is again academic, given that on the facts and evidence before this Court, I have already come to the conclusion that the 1^st Defendant’s case on investment and his role as a mere paying agent is a bad one.

Outcome

214.In the circumstances, the Plaintiff wholly succeeds in its claim against all Defendants.  Moreover the counterclaims of the Defendants are all defeated. 

215.I order that judgment be entered for the Plaintiff against each of the Defendants accordingly.  The precise relief and figures have been set out in Mr Ng’s final submission.  No contention has been raised against the relief or the figures.  I would simply leave it to the Plaintiff to draw up the appropriate judgment, which should first be sent to the Defendants for their comment within a period of 7 days, and then to the Court for final approval.

216.I also make a costs order nisi that the costs of the action (including the counterclaims) be paid by the respective Defendants to the Plaintiff, to be taxed if not agreed.  Unless any party should make an application to vary the costs order nisi within 14 days after this judgment is handed down, the same shall become absolute upon the expiry of the 14 days period.

217.I also direct that on the day when this judgment is handed down (or if that should prove inconvenient, on another day to be arranged with the Court Registry), this judgment be interpreted orally by the court interpreter to the 3^rd Defendant (if she so requires).

218.Lastly, I would like to thank counsel for their extremely helpful assistance.  I wish to add that the 3^rd Defendant has tried her best to defend the claim.  Unfortunately for her, she has failed in her attempt.

Mr Peter Ng SC instructed by Messrs Deacons for the Plaintiff

Mr Jonathan Chang instructed by Messrs Sit, Fung, Kwong & Shum for the 1^st & 2^nd Defendants

The 3^rd Defendant, appearing in person

Cheer Plaza Development Limited, the 4^th Defendant, unrepresented, absent