Heibei Enterprises Ltd and Others v. Livasiri & Co (A Firm) and Others
Read the full judgment text of HCA 20094/1998 on BabelCite. This High Court CFI judgment was delivered on 4 November 2005.
1. This is essentially an action for professional negligence and breach of duties against two firms of solicitors, Messrs Livasiri & Co. (the 1 st defendant) and Messrs Ho & Chan (the 3 rd defendant). It arose out of a project involving Happy Mansion, No.60-62, Village Road, Happy Valley, Hong Kong (“Happy Mansion”) undertaken by the plaintiffs, the 5 th and 6 th defendants in mid-1997, which fell through in 1998 (“the Project”).
Cites 1 case
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HCA20094/1998 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF FIRST INSTANCE ACTION NO.20094 OF 1998 --------------------- BETWEEN
--------------------- Before : Deputy High Court Judge Poon in Chambers
Date of Judgment : 4 November 2005 ------------------------ J U D G M E N T ------------------------ SECTION 1 INTRODUCTION 1.This is essentially an action for professional negligence and breach of duties against two firms of solicitors, Messrs Livasiri & Co. (the 1st defendant) and Messrs Ho & Chan (the 3rd defendant). It arose out of a project involving Happy Mansion, No.60-62, Village Road, Happy Valley, Hong Kong (“Happy Mansion”) undertaken by the plaintiffs, the 5th and 6th defendants in mid-1997, which fell through in 1998 (“the Project”). 1.1 The parties 2.The plaintiffs are all investment companies or, in figurative terms, “window companies” of the Hebei Provincial Government in Hong Kong, responsible for, inter alia, attracting investments into and raising capital for the Province and carrying out investments on behalf of the Province in Hong Kong. 3.The plaintiffs’ shareholders and principal officers were at all material times officials of the Finance Bureau of the Hebei Provincial Government. They were :
4.Mr Yan and Mr Meng were mostly stationed in Hebei. Mr Wang, assisted by Mr Cui, was responsible for the daily operations of the plaintiffs in Hong Kong. Both Mr Wang and Mr Cui were the signatories of the plaintiffs’ bank accounts. The plaintiffs’ then accountant was a Mr Mak Hon Leung (“Mr Mak”). 5.The 1st defendant practises in Hong Kong as well as in the Mainland. The 2nd defendant is and was at all material times an equity partner of the 1st defendant. 6.In about October 1996, the 2nd defendant was introduced to Mr Wang through a Mr Lau Chi Keung of the New China News Agency. Later, the 3rd plaintiff appointed the 1st defendant as its solicitors for its acquisition of 42/F., Far East Finance Centre, Admiralty, Hong Kong (“the FEFC Premises”). The acquisition, which cost HK$69,120,000, was completed on 18 November 1996. Since then, the FEEC Premises have been used as the plaintiffs’ office. 7.The plaintiffs were satisfied with the service rendered by the 1st defendant for acquiring the FEFC Premises. Subsequently, they appointed the 1st defendant to act for them in respect of the Project. The 2nd defendant and Mr Kelvin Chan Kee Yip (“Mr Chan”), an assistant solicitor in the 1st defendant’s employ, handled the matter. 8.The 3rd defendant had at the material times two equity partners, Mr Pat Bobby Ying Ho (“Mr Ho”) and the 4th defendant, and a salaried partner, Mr Paul Emerson (“Mr Emerson”). 9.On 9 October 2000, the 4th defendant was convicted on his own plea in HCCC191/2000 of 10 charges of obtaining pecuniary advantage by deception and 1 charge of theft arising from a string of sizable fraudulent transactions. He was sentenced to 5½ years imprisonment. According to the Summary of Facts prepared by the prosecution in the criminal proceedings, the Project was an event leading to one of the fraudulent transactions but not a subject matter of any of the charges laid against him. 10.The 5th defendant was a corporate vehicle of Mr Simon Cheng Kwok Fai (“Mr Cheng”) for investment in the real property market. The 6th defendant, a BVI company, was a subsidiary of the 5th defendant. Acting for Mr Cheng, the 5th and the 6th defendants in connection with the Project was a Mr Jeffrey She Chin Tong (“Mr She”). 11.The 7th defendant was the joint venture vehicle for the Project pursuant to a Shareholders Agreement signed by the 3rd plaintiff and 6th defendant as shareholders (“the Agreement”) at a meeting held at the 1st defendant’s office on 16 June 1997 (“the 16/6/97 Meeting”). It was originally a shelf company. On 3 July 1997, its shares were formally transferred to the 3rd plaintiff (70%) and the 6th defendant (30%). The Agreement was then, upon the 1st defendant’s advice, dated the same date. 1.2 Essential facts giving rise to the action 12.Trimmed to their very essence, the undisputed facts giving rise to this action can be briefly stated as follows. 13.Under the Agreement, the 3rd plaintiff had to make capital contributions of HK$50,000,000 to the 7th defendant in the form of shareholder loans. Between 18 June 1997 and 27 August 1997, the 1st and the 3rd plaintiffs, as the case may be, sent to the 1st defendant HK$48,000,000 as such capital contributions (“the Contributions”) thus :
14.Between 18 June and 27 August 1997, the 1st defendant transferred to the 3rd defendant HK$46,800,000 out of the Contributions as follows :
15.The 1st defendant retained the balance of HK$1,200,000 to defray, among other things, its legal fees. 16.After the Project had fallen through, the plaintiffs began to press for repayment of the Contributions. Between May and September 1998, the plaintiffs recouped from the 3rd defendant HK$10,200,000, and the 5th defendant HK$800,000. On 29 October 1998, the 1st defendant returned HK$400,000. These sums added up to HK$11,400,000, leaving a balance of HK$36,600,000, which has remained outstanding to date. SECTION 2 THE PARTIES’ DISPUTES 17.On 24 November 1998, the plaintiffs commenced the present action against the 1st defendant. By a consent order dated 29 November 1998, the writ was amended to include other defendants. 2.1 The plaintiffs v. the 1st defendant 18.In the Amended Statement of Claim, the plaintiffs pleaded the following principal complaints against the 1st defendant. 19.First, the 1st defendant was a stakeholder of the Contributions. In breach of its duties as stakeholder, the 1st defendant had failed to properly preserve or manage the Contributions and had, without obtaining consent or approval or the plaintiffs, unilaterally appropriated HK$46,800,000 and forwarded the same to the 3rd defendant without obtaining any security or pledge or any other protection at all. I will call this the Stakeholder Claim. 20.Second, the 1st defendant had been negligent in failing to discharge its proper duty and care towards the Contributions in that it had, inter alia, failed to discharge its duty in accordance with its professional standard and conduct to properly stakehold, preserve, and manage the Contributions; and failed to explain to the plaintiffs the possible risks and consequences that might take place should the sum of HK$46,800,000 be transferred to the 3rd defendant. I will call this the Negligence Claim. 21.Third, the 1st defendant had, in breach of its fiduciary duty, failed to return the sum of HK$1,200,000. I will call this the Residue Claim. 22.The 1st defendant’s pleaded case on the Stakeholder Claim and the Negligence Claim is, in gist, this. It did not hold the Contributions as stakeholder. The 3rd defendant, with the 3rd plaintiff’s approval given at the 16/6/97 Meeting, acted for the 7th defendant. Pursuant to the parties’ common understanding, the 1st defendant made the Transfers to the 3rd defendant as their capital contributions to the 7th defendant, with the plaintiffs’ full knowledge, approval and consent. The 3rd defendant was to hold the same (at least initially) as stakeholder or trustee. The 1st defendant was not negligent as alleged. 23.In its Reply, the plaintiffs made the following points :
24.On the Residue Claim, the 1st defendant’s pleaded case is this. It was entitled to charge the plaintiffs professional charges and disbursements for the services rendered in connection with the Project. It paid HK$300,000 to Mr She on or about 24 July 1997 pursuant to the 3rd plaintiff ’s instructions as compensation of the opening of office premises for the 7th defendant and employing a person to man the same. After deducting the sums of HK$500,000 (to defray its legal fees) and $300,000, the balance of HK$400,000 had already been returned to the 3rd plaintiff without complaint. 25.The plaintiffs agreed that the balance of HK$400,000 had been returned. On Day 6 of the trial (11 May 2004), the plaintiffs agreed to pay the fees for the service rendered by the 1st defendant in respect of the Project subject to taxation. But they did not agree to have such fees deducted from the Contributions. The plaintiffs maintained that they had not instructed the 1st defendant to pay Mr She HK$300,000 as alleged. 2.2 The plaintiffs v. the 2nd defendant 26.The plaintiffs sued the 2nd defendant personally on a dishonoured cheque. 27.It is common ground that on 24 June 1998, the 2nd defendant gave the 3rd plaintiff two post-dated cheques respectively dated 30 June 1998 and 2 July 1998 of HK$5,000,000 each. The cheques were to be presented only if the 3rd plaintiff had not received two cheques of corresponding amount from the 3rd defendant on or before 30 June and 2 July 1998 respectively. 28.It is the plaintiffs’ case that the 3rd plaintiff had not received any cheque from the 3rd defendant on 30 June 1998. The 3rd plaintiff therefore presented the 2nd defendant’s cheque of 30 June 1998 for payment but it was dishonoured. The 2nd defendant’s case is that the 3rd plaintiff had already received the sum of HK$10,000,000 and the two cheques had been returned to the 2nd defendant for cancellation. 29.At the first day of the trial (3 May 2004), the plaintiffs and the 2nd defendant reached settlement whereby their claim against the 2nd defendant was discontinued without prejudice to any issue or their claims against the 1st defendant. 2.3 The plaintiffs v. the 3rd defendant 30.The plaintiffs pleaded that the 3rd defendant at all material times represented the 5th and 6th defendants. However, without the knowledge consent or approval of the 1st and the 3rd plaintiffs, the 3rd defendant unilaterally alleged that it represented the 7th defendant and that it represented Start Orient Limited (“Start Orient”) to negotiate the purchase of the 25 units in Happy Mansion. Between 15 and 18 November 1997, the 3rd defendant purported to pay a total of HK$56,250,000 to Messrs Ng Lie, Lai & Chan (“NLLC”), who represented 16 out of the 25 owners of Happy Mansion, for the intended purchase of their units. Further, without the plaintiffs’ knowledge consent or approval, the 3rd defendant unilaterally appropriated the entire sum of HK$46,800,000 received by way of the Transfers delivered by the 1st defendant as the capital of Start Orient and forwarded the same to NLLC. 31.The plaintiff further pleaded that the 3rd defendant had failed to comply with and observe the express terms that the moneys of the plaintiffs were stakeholder money to be held and preserved by the 3rd defendant as trustee, such terms having been imposed on it by the 1st defendant by the letters accompanying the Transfers. By dissipating the same unilaterally, the 3rd defendant was in breach of its duty as trustee and as stakeholder. 32.It should be noted that the plaintiffs had raised no complaint against Mr Ho or Mr Emerson personally. 33.In their Joint Defence, the 3rd and the 4th defendants alleged that only the 4th defendant acted for the 5th and 6th defendants. They denied that they had acted for the 7th defendant. They admitted that the 4th defendant represented Start Orient in negotiating with the owners of Happy Mansion but averred that the 4th defendant did not seek or require the consent or approval of the 7th defendant to represent Start Orient or approach the owners. 34.The 3rd and 4th defendants further admitted that the 3rd defendant had received the sum of HK$46,800,000 by virtue of the Transfers and that the 4th defendant had disbursed the said sum of HK$46,8000,000. But they went on to plead that the Agreement was a sham transaction. The shareholders loan was in truth a general-purpose loan made by the plaintiffs to Mr Cheng. It was an express or implied condition that the sums advanced would be disbursed by the 4th defendant to Mr Cheng. At trial, Mr Ho and Mr Emerson did not seek to pursue this sham defence. And the 4th defendant, having been absent throughout the proceedings, was not there to support it. On Day 16 of the trial (25 May 2004), upon the plaintiffs’ application, I ordered it to be struck out. 35.On Day 66 of the trial (14 October 2004), the plaintiffs’ claim against Mr Emerson was settled, leaving effectively only Mr Ho to defend the plaintiffs’ claims. The only substantive defence relied on by Mr Ho, as pleaded in the Joint Defence, is that the acts or omissions of the 3rd defendant pleaded by the plaintiffs said to constitute a breach of the 3rd defendant’s duty as trustee or stakeholder were not acts or omissions of the 3rd defendant. They were acts or omissions of the 4th defendant only. Thus Mr Ho was not liable as his co-partner. 2.4 The plaintiffs v. the 4th defendant 36.The plaintiffs sued the 4th defendant on a dishonoured cheque dated 22 June 1998 for HK$10,000,000 issued in favour of the 1st plaintiff. The 4th defendant did not plead any substantive defence to this claim. 2.5 The plaintiffs v. the 5th to 7th defendants 37.The plaintiffs sued the 5th defendant on 6 dishonoured cheques which it issued in favour of the 1st plaintiff with various dates in April 1998, totalling HK$30,000,000. They were dishonoured when presented for payment on or about 20 August 1998. 38.The plaintiffs pleaded that the 6th and 7th defendants had, despite repeated demands, refused to repay the outstanding balance of the Contributions with interest in the total sum of some HK$51 million. The plaintiffs accordingly claimed against them for damages. 39.None of the 5th to 7th defendant had filed any defence. SECTION 3 THE TRIAL 40.In light of the above, the trial focused principally on the liability of 1st defendant and Mr Ho as a partner of the 3rd defendant. The trial began on 3 May 2004. Originally set down for 19 days, it took, in the end, 102 days to finish. 3.1 Representation 41.Throughout the trial, the plaintiffs were represented by :
42.The 1st defendant was represented by Mr Alan Hoo, SC leading Mr Alfred Chan. Mr Paul Lam appeared for Mr Ho and Mr Emerson of the 3rd defendant. The 4th to 7th defendants were all absent. 3.2 Documentary evidence 43.A number of the major events leading to these proceedings were evidenced by contemporaneous documents. They turned out to be the best available evidence on some of the major factual disputes. 44.Initially, the plaintiffs disputed the authenticity of the documents contained in the Disputed Bundle. However, as the trial progressed, the plaintiffs no longer took issue on some of them, including a letter dated 16 September 1997 from the 3rd plaintiff to the 3rd defendant signed by Mr Wang (“the 16/9/97 Letter [P3 to D3]). Further, in the course of the trial, the plaintiffs were ordered to make further specific discovery. As will be seen in a moment, the 16/9/97 Letter [P3 to D3] and some of the documents so disclosed by the plaintiffs shed considerable light on some of the factual disputes. 3.3 Oral evidence 45.The plaintiffs called three witnesses, namely, Mr Meng, Mr Wang and Mr Cui. In light of the factual disputes, I ordered that their witness statements did not stand as evidence in chief. They gave viva voce evidence instead. They had all been cross-examined by Mr Hoo extensively and vigorously. 46.None of the 1st or 3rd defendant had called any witness. There is thus no oral evidence to substantiate their defence or the various matters put as their case in cross-examination. 47.Mr Aiken submitted that in civil proceedings, if the party making the allegation, or whose conduct calls for an explanation, elects not to come forward to testify, the court is entitled to draw such adverse inference against him as circumstances may justify : Herrington v. British Railways Board [1972] AC 877. Further, even in cases where the burden of proof is on the plaintiff and there is extremely meagre evidence to support the plaintiff’s claim, nevertheless if the defendant should elect not to give evidence and there are some specific primary facts which could have been found on the evidence presented to the court, the court is entitled to draw such inference against the defendant from such primary facts : Jone v. Dunkel [1958-1959] 101 CLR 298, High Court of Australia. 48.Mr Hoo submitted that for adverse inferences to be drawn against a defendant who elected not to give evidence, the plaintiff must always make out his case in the first place, though a case to answer is established by some evidence, however weak : McQueen v. Great Western Railway (1875) LR 10 QB 569, Hughes v. Liverpool City Council, unreported, 11 March 1988, Benham Limited v. Kythira Investment [2003] EWCA Civ, unreported. He submitted that the plaintiffs’ evidence is of such an unsatisfactory nature and unreliable quality that the count cannot make any findings of facts against the 1st defendant and no adverse inference can be drawn. 49.I will bear in mind the above submissions when I consider the evidence later. 3.4 No case submission 50.At the conclusion of the plaintiffs’ case, Mr Hoo’s took a rare step in civil trials by making a submission of no case to answer on the ground that the evidence led by the plaintiffs was so unsatisfactory or unreliable that the court should hold that the plaintiffs had not discharged the burden of proof : Yuill v. Yuill [1945] P15. (This tied in with his submission above that that no adverse inference should to drawn against the 1st defendant.) Alternatively, he contended that the plaintiffs had failed to prove their claims against the 1st defendant any way. 51.However, it is not necessary to separately consider the no case submission on its own. For it does not involve any separate question of law and the matters that Mr Hoo relied on are purely factual and identical to those referred to in his alternative submission. The no case and alternative submissions can be conveniently dealt with together. This was in fact what Mr Hoo did in his closing submissions. SECTION 4 THE PRINCIPAL ISSUES 52.Before going into the evidence, I first identify the principal issues that require my determination. 4.1 As between the plaintiffs and the 1st defendant 53.It is the 1st defendant’s pleaded case that it acted for the 3rd plaintiff in respect of the Project. However, the 1st defendant took no issue at trial as to the locus of the 1st or the 2nd plaintiff. So no particular problem arose from the plaintiffs’ status insofar as the 1st defendant is concerned. 54.A solicitor’s duty is defined by the terms and limits of his retainer and any duty of care to be imposed must be related to what he is instructed to do. The duties arising from the retainer are to be determined by reference to the relevant circumstances of the case. The test is what a reasonably competent solicitor would do having regard to the standards normally adopted in his profession : See Midland Bank v. Hett, Stubbs & Kemp [1979] 1 Ch 384, per Oliver J at pp.402G-403C. See for example National Home Loans Corporation Plc v. Giffen Couch & Archer (a firm) [1998] 1 WLR 207 where the solicitor was held not to be negligent when his duty had been specifically limited by the instructions that he received. 55.Thus the principal issues between the plaintiffs and the 1st defendant are :
4.2 As between the plaintiffs and Mr Ho of the 3rd defendant 56.Mr Lam raised in his closing submissions the point, which was not pleaded, that only the 3rd plaintiff has the locus to claim against Mr Ho of the 3rd defendant. Mr Aiken countered by submitting that Mr Ho had not filed a proper defence. Leaving aside these preliminary issues aside, the principal issues between them are :
SECTION 5 THE FACTUAL MATRIX 57.I now come to the evidence. I will begin with a narrative of the major events leading up to the disputes. It is based on the agreed chronology of events and those parts of the evidence that are uncontroversial. The purpose of the narrative is to set out the factual matrix against which the evidence pertaining to the main issues are to be considered. 5.1 The pre-Agreement stage
58.In about April or May 1997, the 2nd defendant introduced Mr She to Mr Wang. Discussions about acquiring Happy Mansion then ensued. 59.On or about 12 May 1997, Mr Wang obtained from Mr She some documents, one of which set out an acquisition formula. According to the formula, the initial deposit for the acquisition was estimated at HK$50 million. Another document was an analysis on the costs and profits in respect of the acquisition and redevelopment of the Happy Mansion. The total costs were estimated at HK$380,687,000 whereas the profits (before tax) were projected at HK$103,817,000. The other documents were two purported layout plans of the building proposed for redevelopment. 60.On 12 May 1997, Mr Wang faxed the above documents (except the two purported layout plans) to Mr Meng in Hebei (“the 12/5/87 Letter [Wang to Meng]”), advising him that it was the 2nd defendant who took the lead in the project. Mr Wang asked Mr Meng for his instructions if the plaintiffs would participate in it. On or about 16 May 1997, Mr Meng replied to Mr Wang by fax, asking him to work out a plan and carry out a feasibility study before the matter was to be referred to Mr Yan for instructions. 61.Later in about mid-May 1997, Mr Meng came to Hong Kong to learn more about the project. 62.On or about 29 May 1997, Mr Wang faxed to Mr Meng for his reference another set of documents that Mr She gave him. One of them revised the acquisition formula by replacing the acquisition deposit of HK$50 million with HK$70 million. The other documents were a purported costs and profits analysis for redeveloping Happy Mansions and detailed explanations of the figures in the analysis. 63.By fax dated 4 June 1997, Mr She gave Mr Wang a further revision of the acquisition formula. The percentage that the sum of HK$70 million represented via-s-via the total acquisition costs was changed from 25% to 27%.
64.The acquisition formula in its final form (“the Acquisition Formula”), read2 :
65.Mr Wang confirmed in his oral testimony that the plaintiffs had agreed to the Acquisition Formula as the basis for the Project. It would appear that the Acquisition Formula set out the parties’ board agreement on how to carry out the Project. Several points arose from it :
66.Points (6) and (7) appeared to be a double safeguard. First, Firm A should not release from the Acquisition Deposit any deposit to Firm B until Mr She’s company produced a valid conditional sale and purchase agreement. Second, Firm B should not release the deposit to individual owner until and unless all owners had agreed to sell. If the overall acquisition failed within six months, Firm A and Firm B would have to return whatever amount of deposit they were still holding at the time.
67.On 10 June 1997, Mr Meng came to Hong Kong again. In the morning on 13 June 1997, he had a meeting with Mr Wang, Mr She and the 2nd defendant to discuss the project. During the meeting, the 2nd defendant advised that a joint venture company should be set up for the purposes of the Project. 68.After the meeting, Mr Meng faxed a letter to Mr Yan (“the 13/6/97 Letter [Meng to Yan]”), seeking his approval to participate in the Project. Mr Meng made several points in this letter. First, the Project was intended to be a confirmor sale or figuratively a “one buy, one sell” transaction, to be completed within six months. Upon successful completion, it would generate a profit of about HK$20 million. And the plaintiffs would reap half of it. Second, the plaintiff would contribute as capital HK$50 million representing 60% of the project’s costs. The partner, Carringford Land Limited (“Carringford Land”), would be responsible for the balance of 40%. The capital contributions would be deposited with the 1st defendant and would only be paid out after all the 25 unit owners had signed the agreements. Third, the 2nd defendant would handle and take full responsibility of the transaction. If it fell through, he would be responsible for returning the plaintiffs’ capital contribution while Carringford Land would pay the interest on the capital. Fourth, Mr Meng could not see any risk. The chance of success was over 90%. The 2nd defendant would take care of the buyer. The chance of the intended buyer, the China Everbright Bank, buying was 90%. Lastly, Mr Meng sought Mr Yan’s consent for a sum of HK$5 million to be deposited immediately with the law firm (presumably, the 1st defendant). The balance had to be raised by borrowing from the bank. 69.On the same afternoon, Mr Yan gave his approval for the plaintiffs to participate in the Project. He directed that arrangement to be made for the remittance of the sum of HK$5 million as requested.
70.The 1st defendant was then instructed to prepare a shareholders’ agreement for the intended joint venture company. On 14 June 1997, Mr Kelvin Chan faxed the first draft of the shareholders agreement of the joint venture company to the 3rd plaintiff (attention Mr Wang) and the 6th defendant (attention Mr She).
71.The Agreement was then finalised at the 16/6/97 Meeting. It is common ground that the Meeting was attended by Mr Meng, Mr Wang, Mr She, the 2nd defendant and Mr Chan. (It is the plaintiff’s case, disputed by the 1st defendant, that Mr Cui also attended the meeting although he came late.) Mr Chan explained each and every clause of the draft to the parties. Then Mr Wang on behalf of the 3rd plaintiff and Mr She on behalf of the 6th defendant signed the Agreement. 5.2 The Agreement 72.Some of the more pertinent provisions of the Agreement3 are summarised below. A. The Project defined 73.The Project is defined as “to acquire and develop Happy Mansion”. (Clause 1.1) B. Shareholdings 74.The 3rd plaintiff and the 6th defendant respectively held 70% and 30% of the issued shares of the 7th defendant. (Clause 2 of the Preamble) C. Board of directors 75.The board of directors shall be constituted of not less than three directors, unless and until the shareholders agree otherwise in writing. The 3rd plaintiff was entitled to nominate two directors, which it did by nominating Mr Wang and Mr Cui. The 6th defendant was entitled to nominate one director, which it did nominating Mr She. (Clause 6.1) (On 3 July 1997, the above nominations took effect when Mr Wang, Mr Cui and Mr She were formally appointed directors of the 7th defendant. It is common ground that no other directors had since been appointed.) 76.The control of the business and the policy of the running of the business of the 7th defendant shall be determined by the board of directors. (Clause 7.1) D. Completion of the Project 77.Unless and until the written consent of all the parties to the Agreement have been obtained, the only business that the 7th defendant is engaged in shall be to acquire and develop the Project. (Clause 2.1) 78.The 3rd plaintiff and the 6th defendant shall use their best endeavours and most economical means, within six months after the signing of the Agreement, to realise and complete the business objective of the 7th defendant as stated in Clause 2.1, which refers to binding all bona fide owners in the Project with a contract that can be enforced by specific performance or one that has the same effect indirectly. (Clause 2.2) E. Bank account 79.Unless approval had been obtained from both shareholders, the operation and transaction of the bank account owned by the 7th defendant shall be jointly signed by the nominee of both of them for the same to be effective. (Clause 7.3) (It is common ground that despite Clause 7.3, no bank account had been opened by or for the 7th defendant at all.)
80.The total amount of capital contributions in the form of shareholders’ loans was agreed at HK$71.5 million, which was spilt between the 3rd plaintiff and the 6th defendant in the same 70/30 ratio. In monetary terms, the 3rd plaintiff agreed to contribute HK$50 million and 6th defendant, HK$21.5 million. (Clauses 11.2 & 3 and the Schedule) 81.Subject to Clause 12, the shareholder’s loans were repayable at once upon demand. The repayment shall be made according to the corresponding shareholdings ratio. Subject to any written consent of the shareholders, the loans shall incur interest at the best lending rate fixed by the Hong Kong Association of Banks at the time. (Clause 11.3(b)) 82.All provisions of shareholders’ loans made by the 3rd plaintiff and the 6th defendant to the 7th defendant had to be processed and settled through law firms practising in Hong Kong. (Clause 11.3(c)) G. Repayment of the shareholders’ loans 83.The shareholder’s loans were not repayable within six months after the Agreement had been executed. (Clause 12.1) 84.The 6th defendant irrevocably guaranteed and gave undertakings to the 3rd plaintiff that, if the 7th defendant was unable to realise and complete the business objective stated in Clause 2.2 within six months after the execution of the Agreement, unless it was caused by the 3rd plaintiff’s breach thereof :
5.3 Making the Transfers 85.On the evidence before me, it is not clear if the 6th defendant had ever made any capital contribution to the 7th defendant pursuant to the Agreement at all. As to the Contributions made by the 1st and 3rd plaintiff, see paragraph 13 above. How and under what circumstances the 1st defendant then made the Transfers out of the Contributions to the 3rd defendant merit closer examination.
86.The first remittance received by the 1st defendant was HK$4,999,900 (HK$5,000,000 less HK$100 bank charge). On 18 June 1997, the 1st defendant made the 1st Transfer (HK$5,000,000) to the 3rd defendant by cheque. The covering letter accompanying the cheque (“the 18/6/97 Letter [D1 to D3]”) read as follows :
I will refer to the aforesaid undertaking imposed by the 1st defendant on the 3rd defendant as “the Undertaking” below. 87.The 1st defendant then advised the 3rd plaintiff of the 1st Transfer by letter dated 18 June 1997 (“the 18/6/97 Letter [D1 to P3]”) thus :
The original Receipt 31372 (“the Official Receipt”) and a copy of the 18/6/97 Letter [D1 to D3] were enclosed. 88.The following points emerged from the 18/6/97 Letter [D1 to P3] and the Official Receipt :
89.By letter dated 27 June 1997 (“the 27/6/97 Letter [D1 to P3]”), the 1st defendant, among other things, asked the 3rd plaintiff to arrange the payment of the balance of its capital contribution of HK$45 million to the 1st defendant for handling. This letter read :
90.Four points arose from the 27/6/97 Letter [D1 to D3] :
91.In the event, the 1st and 3rd plaintiffs forwarded the balance of HK$43,000,000 to the 1st defendant, who then transferred HK$41,800,000 to the 3rd defendant. In each of the covering letters accompanying the cheques for the 2nd to 6th Transfers, (“the Covering Letters [D1 to D3]” collectively), the 1st defendant imposed the Undertaking on the 3rd defendant. However, it had not imposed the Pre-Condition on the 3rd defendant as mentioned in the 27/6/97 Letter [D1 to P3]. 92.The 1st defendant did not copy the Covering Letters [D1 to D3] to the plaintiffs at the time. They were only provided in one set on 3 October 1997. The letter enclosing the copy Covering Letters (“the 3/10/97 Letter [D1 to P3]”) read :
In this letter, the 1st defendant stated that it made the Transfers to the 3rd defendant on behalf of the 3rd plaintiff. 5.4 Mr She moving into FEFC Premises 93.In or about July 1997, Mr She moved into FEFC Premises as a tenant. He occupied an office, and his assistant, an office desk. Mr She had his own fax machine. According to his calling card, the 7th defendant was said to be a subsidiary of the 1st plaintiff; Mr She was a director of both the 7th defendant and Carringford Land; and Mr She’s fax number was 2143-6032. 94.By cheque dated 24 July 1997, the 1st defendant paid a sum of HK$300,000 to Carringford Land from its client’s account. This sum, as noted, came from the HK$1,200,000 retained by the 1st defendant from the Contributions. According to the 1st defendant’s cheque voucher of the same date, the client was stated to be the 7th defendant. This sum was described as “part of the commission for the acquisition of the captioned re-development property”, which could only mean the Project. 95.In about mid-1998, after the Project had fallen through, Mr She left the FEFC Premises. 5.5 Purported processing of the Project 96.On 27 August 1997, Mr She wrote to Mr Wang reporting on the purported progress of the acquisition of Happy Mansion. He painted a rosy picture and mentioned these points :
97.Mr She enclosed with this letter a table on the purported acquisition progress. The table set out the particulars of the progress in respect of each unit. (Two of the units were purportedly held by one 昌境投資有限公司, a company controlled by Mr She’s side (“昌境”).) Mr She estimated that the profit would range from HK$18 to 25 million. Two newspaper clippings on the property market in the Happy Valley area were also attached. 98.On 20 September 1997, the 1st defendant wrote to the 3rd defendant, requesting as per the 3rd plaintiff ’s instructions for copies of the duly signed preliminary agreements for sale and purchase in respect of the acquisition of the units in Happy Mansion (“the 20/9/97 Letter [D1 to D3]”). This letter was copied to the 3rd plaintiff, attention Mr Cui and Mr Mak. 99.On 23 September 1997, the 3rd defendant wrote back (“the 23/9/97 Letter [D3 to D1]”). According to this letter, the 3rd defendant had reminded its client to send the duly signed preliminary agreements for sale and purchase to the plaintiffs for perusal. The 3rd defendant was instructed that its client would deliver the same directly to the plaintiffs. In the meantime, the 3rd defendant was awaiting the draft formal agreement for sale and purchase from the vendor’s solicitors and would let the 1st defendant have sight of the same in due course. 100.By letter dated 17 October 1997, Mr She reported the purported progress of acquisition to Mr Meng. He said that other than the two units held by昌境, negotiations with other owners had been successful. The conditional sale and purchase agreements would hopefully be signed within the next 10 days at the law firm’s office. At the same time, he was contacting various developers about acquisition. The way to proceed was to sell the company which had acquired the units together with the two units held by昌境to save the 2.75% stamp duty. Mr She enclosed some further information on Hong Kong real estate for Mr Meng’s attention. In the enclosure, Mr She stated that his side had already begun talks in respect of the acquisition, repeated the Acquisition Formula in substance, and set out the calculation of the projected costs and profits. 101.In the 2nd half of November 1997, the 3rd defendant faxed to the 5th defendant 16 letters (dated 15 or 18 November 1997 as the case may be) from the 3rd defendant to NLLC (“the 16 Letters [D3 to NLLC]”). These were in substance pro forma letters in respect of the purported sale of some of the units in the Happy Mansion. (The plaintiffs disputed the authenticity of 10 of these Letters which bore the GEN reference numbers.) According to each of these Letters :
102.After receiving the 16 Letters [D3 to NLLC], the 5th defendant faxed the same to Mr She. 5.6 The plaintiffs requesting the return of HK$20,000,000 103.Also in the 2nd half of November 1997, the plaintiffs were in need of money. Mr Wang therefore asked Mr She for the return of HK$20 million from the plaintiffs’ capital contributions to the 7th defendant. 104.On 18 December 1997, Mr She wrote to Mr Meng. He said that as at December 1997, the deposits formally paid were in the sum of HK$67,040,000. Five units were still waiting for the release of the deposits by Mr She’s side. Because of the stock crash in October, a buyer was yet to be found to acquire the units. In order to protect the plaintiffs, Mr She’s side proposed to first set the target for profits that the plaintiffs might make, say, HK$6,000,000. That profit plus interest would then be paid by instalments. If possible, the sum of HK$10,000,000 would be repaid before end of December 1997, the full balance in March and April 1998. Mr She also said that his side learnt of the plaintiffs’ request to have capital of HK$20,000,000 returned before 15 December 1997. His side had tried to raise funds by mortgaging a shop premises, car parking space and six residential units without success. (As later transpired during the course of the trial, these properties were situated at one Profits Mansion, Fei Fung Street, Kowloon and Mr She’s side attempted to effect an mortgage on them to raise money.) They were still trying to raise funds from all other means. 105.In the end, Mr She’s side of company had been unable to meet the plaintiffs’ request. The purported mortgage on to the Fei Fung Street Properties only gave rise to further disputes and spawned another High Court Action between some of the parties herein, including the plaintiffs and the 1st defendant. That action is pending. 5.7 The Cancellation Agreement 106.On 3 March 1998, the 1st defendant, pursuant to instructions, faxed to the 3rd plaintiff a draft of a cancellation agreement to cancel the Agreement (“the Cancellation Agreement”). 107.By letter dated 9 March 1998, the 1st defendant stated the following to the 3rd plaintiff :
108.By letter dated 11 March 1998, the 1st defendant sent the final draft of the Cancellation Agreement to the 3rd plaintiff, the 6th and 7th defendants for signing. 109.The following provisions in the Cancellation Agreement4 are pertinent:
110.In the event, the Cancellation Agreement was duly signed by the parties in or about March or April 1998. For the 3rd plaintiff, it was Mr Cui who signed the Cancellation Agreement. Mr Wang confirmed under cross-examination that he would not have authorised Mr Cui to sign it unless the contents were true. 111.By letter dated 23 March 1998, the 1st defendant asked the 6th and 7th defendants for signed copy of the Cancellation Agreement and reminded them that according to the Cancellation agreement, a sum of HK$3 million would be repayable on 25 March 1998. In the end, it was Mr Cui who on 16 April 1998 faxed to the 1st defendant copy of the Cancellation Agreement duly signed by all parties. 5.8 The recovery process 112.What followed were various futile attempts by the plaintiffs between March 1998 and the commencement of this action in November 1998 to recoup their capital contributions. I will not detail the recovery process except to note the following points. 113.First, the plaintiffs had been directly pressing the 3rd to 6th defendants for repayment of their contributions. Separately, the plaintiffs instructed the 1st defendant to, and the 1st defendant did, from time to time issue letters following up the recovery process and demand letters threatening legal action. This is apparent from the correspondence between the parties at the time. 114.On 20 April 1998, Mr Cui gave a copy of purported sale and purchase agreement in respect of 12/F of the Happy Mansion to Mr Chan. (It is Mr Cui’s evidence that he received copies of the provisional sale and purchase agreements relating to 10 units from the 4th defendant on 20 April 1998. He then faxed the above copy to Mr Chan.) On the following day, the 1st defendant wrote to the 3rd defendant (“the 21/4/98 Letter [D1 to D3]”) :
It is apparent from the 21/4/98 Letter [D1 to D3] that the 1st defendant was not previously aware of Start Orient’s involvement until Mr Chan received the copy sale and purchase agreement from Mr Cui on 20 April 1998. 115.Third, on 30 April 1998, Mr Meng wrote to the 2nd defendant (“the 20/4/98 Letter [Meng to D2]”) :
116.Fourth, on 21 May 1998, Mr Cui faxed to Mr Chan copies of the 16 Letters [D3 to NLCC]. (It is Mr Cui’s evidence that he received them from the 4th defendant on the same day.) 117.Fifth, on 9 June 1998, the 1st defendant at the request of the 3rd plaintiff set out in a letter the particulars of the payment of capital to the 7th defendant : HK$46,800,000 to the 3rd defendant and HK$1,200,000 retained by the 1st defendant. 118.Sixth, on 10 June 1998, Mr Wang on behalf of the 3rd plaintiff sent a letter to the 3rd and 4th defendants (“the 10/6/98 Letter [P3 to D3 & D4]”). It summarised the attempts and steps taken by the plaintiffs to recover their monies. It read :
Subsequently on 12 June 1998, Mr Wang did, as threatened, issue letters to Mr Ho and Mr Emerson of the 3rd defendant. On the same day, the 1st defendant issued a letter of demand to the 3rd defendant asking for repayment by 1:00 pm on 13 June 1998. The 3rd plaintiff also faxed the same demand letter to the 3rd defendant. 119.Seventh, by letter dated 6 July 1998, the 3rd defendant sent a letter to the 1st defendant (“the 6/7/98 Letter [D3 to D1]”), setting out its version of the events thus :
Mr Meng said under cross-examination that he was aware of this letter. 120.Finally, on 3 September 1998, a meeting was held in Shenzhen between the plaintiffs, the 2nd defendant, Mr Chan and Mr She about the recovery of the Contributions. The plaintiffs’ Mainland legal advisers from Hebei Jili Law Office also attended the meeting. On 4 September 1998, the 1st plaintiff faxed a legal advice from Hebei Jili Law Office to the 1st defendant. In this legal advice, it was alleged, among other things, that the 1st defendant had without the 3rd plaintiff’s authority made the Transfers to the 3rd defendant. It was the first time that the plaintiffs made such a complaint in writing. 121.This completes the narrative on the factual matrix. 122.I will turn to the evidence on the principal issues that I have identified in Section 4 above in a moment. In examining the evidence and making findings, I will take into account counsel’s submissions. However, I will not deal with every single point taken by counsel. Suffice it to say that I have already carefully considered their submissions in full. 123.Before proceeding any further, it is convenient to first dispose of two points. The first relates to the parties that NLLC and the 3rd defendant represented. It is a minor point, which was made an issue in the pleadings but can hardly be disputed on evidence. And I will deal with it in Section 6. The second point is more substantial. It relates to the 1st defendant’s role in respect of the Project. This I will consider in Section 7. SECTION 6 Who did NLLC AND THE 3RD DEFENDANT represent? 6.1 NLLC acting for the unit owners 124.According to the 16 Letters [D3 to NLLC]5, not contradicted by any evidence, NLLC was the solicitors acting for some of the 25 unit owners in Happy Mansion. The plaintiffs disputed the authenticity of 10 of the 16 Letters [D3 to NLLC] on the basis that the purported sale and purchases referred to therein were bogus. This does not affect the fact that NLLC did act for some of the unit owners. I therefore find that NLLC acted for some of the unit owners in the intended sale and purchase of their units. 6.2 The 3rd defendant acting for the 5th and 6th defendants and Start Orient 125.The evidence clearly shows that the 3rd defendant acted for the 5th and 6th defendants. In the 6/7/98 Letter [D3 to D1]6, the 3rd defendant stated in effect that it acted for the joint venture partners of the plaintiffs in the Project, which could only mean the 5th and 6th defendants. 126.Further, the 16 Letters [D3 to NLLC] clearly established that the 3rd defendant acted for Start Orient. Again, the plaintiffs’ dispute on the authenticity of 10 of these 16 Letters does not affect this point. And in that capacity, the 3rd defendant dealt with NLLC, the solicitors acting for some of the unit owners in Happy Mansion. The 3rd defendant’s role in this regard is also supportable by the Cancellation Agreement. In Clause 1.2 of the Cancellation Agreement, the 3rd defendant was referred to as “the lawyer for the acquisition project”, which indicates that the 3rd defendant was then engaged in the acquisition of the units in Happy Mansion. And the only entity that was then purportedly negotiating the acquisition of the units was Start Orient. 127.I therefore find that the 3rd defendant acted for the 5th and 6th defendants as well as Start Orient. 128.For the reasons stated in paragraphs 145 to 150 below, I am unable to make any finding if the 3rd defendant acted for the 7th defendant. It follows that I am unable to find, one way or the other, if the plaintiffs had approved of appointing the 3rd defendant to act for the 7th defendant at the 16/6/97 Meeting as alleged by the 1st defendant. SECTION 7 THE plaintiffs’s case on the 1ST DEFENDANT’s role other than as a stakeholder 129.The plaintiffs attempted to expand the role of the 1st defendant in respect of the Project in two aspects. 7.1 Guarantees by the 2nd defendant 130.The first aspect takes the matters back before 13 June 1997 when the solicitor-client’s relationship first arose. 131.The plaintiffs sought to allege in the Reply that the 2nd defendant had at various meetings before 16 June 1997 guaranteed that the 1st defendant would be responsible for and control the Project. In their oral evidence, the plaintiffs’ witnesses went on to allege that the 1st defendant had at various meetings prior to 13 June 1997 guaranteed the profitability of the Project and the safety of the capital contributions to be made by the joint venture partners. 132.However, on Day 34 of the trial (26 August 2004), Mr Chow conceded that the plaintiffs did not seek to rely on these alleged guarantees to support any independent cause of action but would only refer to them as background. On Day 49 (16 September 2004), I ruled that the plaintiffs were not entitled to rely on such matters to define or expand the 1st defendant’s scope of duty. 133.In any event, I would have no hesitation to reject the plaintiffs’ case on the alleged guarantees for two reasons. First, the guarantees, if ever made at all, were no doubt of great importance to the plaintiffs. They effectively safeguarded the plaintiffs from any loss that might arise from the Project. But contrary to any reasonable expectation from a commercial point of view, they were not recorded in the Agreement or reduced into writing at all. Second and more importantly, there is simply no reason why the 2nd defendant would have to make the alleged guarantees, thereby exposing his firm and him personally to such huge risks. Neither he nor the 1st defendant was related to or had any interest in any of the joint venture partners. They were not party to the Project and did not have any beneficial or commercial interest in it. The only monetary gain that the 1st defendant would be able to derive out of the transaction was the fees for the legal service that it rendered to the plaintiffs. But such fees (shown to be about HK$500,000 subsequently) were obviously insignificant when compared to the financial risks that the alleged guarantees would entail. It could hardly provide any incentive for the 2nd defendant to offer the alleged guarantees at all. 134.In the 12/5/97 Letter [Wang to Meng]7, Wang reported to Mr Meng that it was the 2nd defendant who took the lead in the Project. In the 13/6/79 Letter [Meng to Yan]8, Mr Meng in his turn reported to Mr Yan that the 2nd defendant was fully responsible for the operation of the Project and the return of the plaintiffs’ investment should the Project fail. I note how Mr Wang and Mr Meng had described to their superior the role of the 2nd defendant and, presumably through him, that of the 1st defendant in the Project. They might have their own reasons to do so and I will not speculate. These letters did not sit well with the fact that it was Mr She, who (1) fed the plaintiffs with information relating to the Project at the pre-Agreement stage and (2) thereafter reported to the plaintiffs on the purported progress of the Project. Mr She had no business association whatsoever with the 1st or 2nd defendant. In any event, having rejected the plaintiffs’ case on the alleged guarantees, I am not going to attach any weight to the them. 7.2 Operator, stakeholder and guarantor of the Project 135.The second aspect relates to what happened at the 16/6/97 Meeting. 136.The plaintiffs alleged in the Reply that the 2nd defendant represented at the 16/697 Meeting, among other things, that the 1st defendant would be responsible for the compensation should the plaintiffs suffered any loss from the investment. The thrust of the oral evidence of the three plaintiffs’ witnesses is that the 2nd defendant said that the whole Project was entrusted to the 1st defendant, that the 1st defendant would be responsible for the operation of the Project, including finding a buyer for the sub-sale of the units and guaranteeing the safety of the plaintiff ’s capital contributions. The plaintiffs’ witnesses were in effect alleging that the 2nd defendant said that the 1st defendant was the stakeholder, guarantor and operator of the entire Project. 137.The plaintiffs’ case suffered the same sort of difficulties that I have described above. First, if their case were true, the 1st defendant would be assuming a very active and central role in the Project. But none of these important aspects of the 1st defendant’s role was incorporated in the Agreement or evidenced in some kind of formal agreement between the joint venture partners and the 1st defendant. It is further contradicted by the Agreement itself. Under Clause 12.2, it was the 6th defendant, and not the 1st defendant, who offered some sort of guarantee by an irrevocable undertaking in respect of repayment of the 3rd plaintiffs’ contributions should the Project fail to complete within six months. Second, I see no reason why the 2nd defendant had to make such representation, which went well beyond the 1st defendant’ normal role as solicitors and would expose his firm and himself personally to considerable risks. 138.I further find that on the evidence before me, the 1st defendant was not responsible for operating and did not operate the Project at all. It is clear from the narrative on the purported processing of the Project9 and the correspondence emerging at the recovery process10 that the Project was operated by Mr She’s side of companies, including the 5th and 6th defendants and Start Orient, assisted by the 3rd defendant. And I so find. SECTION 8 THE STAKEHOLDER CLAIM 139.I now come to the Stakeholder Claim. The first principal issue is whether the 1st defendant was instructed to stakehold the Contributions. The oral evidence of the plaintiffs’ witnesses may be summarised in paragraphs 140 to 143 below. 140.The Contributions were meant to be the plaintiffs’ contributions to the 7th defendant. Such contributions should be made as soon as possible. The 2nd defendant suggested that the capital contributions by the plaintiffs should be sent to and safe-kept by the 1st defendant. The moneys were to be deposited with the 1st defendant for 3 reasons :
141.Contrary to those instructions and without the plaintiffs’ knowledge or consent, the 1st defendant made the Transfers to the 3rd defendant. None of the 16/6/97 Letter [D1 to D3] or the Covering Letters [D1 to D3] were written with the plaintiffs’ instructions consent or authority. 142.Sometime in September 1997, Deloittes carried out an audit of the plaintiffs’ accounts up to 30 June 1997 for the purpose of a proposed listing with the Hong Kong Stock Exchange. The auditors could not locate the official receipt for the first remittance of HK$5,000,000. Mr Mak, the plaintiffs’ accountant, could not find it either. He then reported the matter to Mr Cui. Mr Cui telephoned Mr Chan for the official receipt. Mr Chan told Mr Cui that the plaintiffs’ money had been sent over to the 3rd defendant. That was the first time that the plaintiffs learnt of the 3rd defendant and the fact that the money had been sent to the 3rd defendant. But the 3rd defendant did not act for the 7th defendant. The 1st defendant did. The plaintiffs had not heard of the 3rd defendant previously. They were not told of its involvement either. Further, the plaintiffs could not have consented to the 3rd defendant’s involvement as they would have had to do background checks on the 3rd defendant and they had not done so. However, when Mr Chan told Mr Cui that the Transfers had been made to the 3rd defendant, Mr Cui did not make any record of the name of the 3rd defendant. Nor did Mr Meng or Mr Wang asked Mr Cui about the name of the 3rd defendant when they learnt of the Transfers later. 143.Initially, the plaintiffs denied that it had ever received the 18/6/97 Letter [D1 to P3]. Hence they disputed the authenticity of the Letter and the copy hand-delivery book which had the entry that the Letter was hand delivered to the 3rd plaintiff on 18 June 1997. Later the plaintiffs changed their stance and accepted that they had received the letter at the time. But neither Mr Wang nor Mr Cui had been unable to say exactly what happened to it after receipt. It had somehow been misfiled, they said. (This presumably explained why neither Mr Cui nor Deloittes was able to locate the Official Receipt when the audit of the 3rd plaintiff was carried out in September 1997.) In March or April 2002, Mr Mak, who had already left the plaintiffs’ employ, was asked to come back to FEFC to locate the Official Receipt. He found it and it is Mr Cui’s evidence that it was at some stage sent to the plaintiffs’ lawyers. But for some reasons not apparent form the evidence before me, the Official Receipt has not been disclosed as part of the plaintiffs’ documents. 144.I will consider the veracity of the plaintiffs’ evidence below. 8.1 Did the plaintiffs instruct the 1st defendant to act for the 7th defendant? 145.Here, the point is : if the plaintiffs did instruct the 1st defendant to act for the 7th defendant, then when the Contributions were sent to the 1st defendant, it must stakehold them, as capital contributions form the plaintiffs, on behalf of the 7th defendant. There is no justification to make the Transfers to the 3rd defendant. 146.The 1st defendant’s case is that it was the 3rd defendant who acted for the 7th defendant. This the 3rd defendant denied. However, having elected not to give evidence, neither the 1st defendant nor the 3rd defendant had adduced any oral evidence to substantiate its respective case. 147.Although the defendants had adduced no oral evidence to the contrary, it does not follow that I must accept the plaintiffs’ evidence. In fact, I find it quite difficult to accept their evidence. There is no documentary evidence, either from the 1st or 7th defendant, to show that the 1st defendant had been appointed as the 7th defendant’s solicitors. Further, had the 1st defendant been so appointed, why would it have not acted accordingly? 148.The position revealed by the documentary evidence is far from clear. The 1st defendant’s internal vouchers for those parts of the Contributions made on and after 11 July 1997 referred to the 7th defendant as client. So did the cheque voucher for the payment of HK$300,000 to Carringford Land11. Mr Aiken contended that the 1st defendant had regarded the 7th defendant as its client and had therefore received the monies on behalf of the 7th defendant. But if that were the case, why would the 1st defendant write in the 18/6/97 Letter [D1 to D3]12 and the Covering Letters [D1 to D3]13 accompanying each of the 2nd to 6th Transfers that the 3rd defendant could only release the money to the 7th defendantupon receiving the 1st defendant’s written instructions? The 1st defendant would have already received the moneys from the plaintiffs on behalf of the 7th defendant. 149.Adding to the confusion is that the internal accounting record of the 3rd defendant relating to the Transfers also referred to the 7th defendant as client. But there is no evidence to show that the plaintiffs or the 7th defendant had so appointed the 3rd defendant. Further, in none of the letters issued by the 3rd defendant had the 3rd defendant stated that it had acted for the 7th defendant. Even the Cancellation Agreement did not make this point clear. There the 3rd defendant was only described rather imprecisely as the lawyer for the “acquisition project”, and not the lawyer for the 7th defendant. 150.In my view, the evidence on the question as to who acted for the 7th defendant is unsatisfactory and conflicting. I cannot make any specific finding if it was the 1st defendant or the 3rd defendant who acted for the 7th defendant. 8.2 The 16/9/97 Letter [P3 to D3] 151.As noted, Deloittes carried out an audit of the plaintiffs’ accounts in September 1997 for the purpose of an intended listing exercise. In the account file kept by Deloittes (Exhibit A) was the 16/9/97 Letter [P3 to D3], which read :
This letter was drafted by Deloittes and signed by Mr Wang on behalf of the 3rd plaintiff. The confirmation sought in it was given by the 4th defendant on behalf of the 3rd defendant on 30 September 1997. 152.Further, a copy of the 18/6/97 Letter [D1 to P3] with its enclosure, namely the 18/6/97 Letter [D1 to D3] and the Official Receipt was contained in the Deloittes’ file. They formed part of the 3rd plaintiff’s account records as of 30 June 1997 as referred to in the 16/9/97 Letter [Ps to D3] above. 153.The 16/9/97 Letter [P3 to D3], the copy 18/6/97 Letter [D1 to P3] and the enclosure including copy Official Receipt kept in the Deloittes’ file are most damaging, if not fatal, to the plaintiffs’ case on the Stakeholder Claim. It clearly establishes the following points. 154.First, the 18/6/97 Letter [D1 to P3] enclosing the copy 18/6/97 Letter [D1 to D3] and the Official Receipt had not been misfiled after the plaintiffs had received them on 18 June 1997. They had found their way into the Deloittes’ file on the 3rd plaintiff’s account records as of 30 June 1997. They could only have come from the plaintiffs. Mr Aiken submitted that they were probably supplied by the 1st defendant. He was referring to an inspection of the statutory books of the 7th defendant kept by the 1st defendant in September 1997. But those statutory books could not have contained the letters and the Official Receipt. Further, after sending the Official Receipt to the 3rd plaintiff, the 1st defendant only had the filing copy of the Official Receipt. (The filing copy is what the 1st defendant had disclosed in its list of documents and there is no allegation that the 1st defendant had been in possession of the copy Official Receipt and had failed to disclose it.) What was contained in the Deloittes’ file is the copy Official Receipt, which could not have come from the 1st defendant. I reject Mr Aiken’s submission. 155.Second, not only had the plaintiffs received the 18/6/97 Letter [D1 to P3] and the enclosure on 18 June 1997, but they must have also read them and knew of their contents. The plaintiffs knew perfectly well that the 1st defendant had on 18 June 1997 made the 1st Transfer to the 3rd defendant with the Undertaking imposed. The plaintiff’s evidence that they first came to know about the Transfers including the 1st Transfer sometimes in September 1997 must therefore be rejected. 156.Third, the plaintiffs must have instructed the 1st defendant to make the 1st Transfer to the 3rd defendant. The 16/9/97 Letter [P3 to D3] did not raise any complaint that the 1st Transfer was wrongful. Instead, it sought confirmation that the 3rd defendant had in fact received it. It follows that the plaintiffs must have instructed the 1st defendant to forward to the 3rd defendant their capital contributions to be made to the 7th defendant under the Agreement. There is no substance whatsoever in the plaintiffs’ allegations that they had not consented to or approved of the Transfers. 157.Fourth, the plaintiffs had knowledge of the 3rd defendant’s involvement in the Project. Otherwise, they would not have instructed the 1st defendant to forward their capital contributions to the 3rd defendant. 158.Mr Wang had been unable to come up with any credible explanation why the 16/9/97 Letter [P3 to D3] was written, if the plaintiffs’ case that the 1st defendant was instructed to stakehold the Contributions and it had without authority made the Transfer to the 3rd defendant were true. I can seen none either. 8.3 The plaintiffs’ knowledge of the 3rd defendant’s involvement 159.There is further evidence relating to the plaintiffs’ knowledge of the 3rd defendant’s involvement at the time. 160.In the 20/9/97 Letter [D1 to D3]14, the 1st defendant requested as per the 3rd plaintiff’s instructions for copies of the preliminary sale and purchase agreements. The 3rd plaintiff would not have given such instructions if they were not aware of the 3rd defendant’s involvement in the Project. Mr Cui said that he only received the copy preliminary sale and purchase agreements from the 4th defendant on 20 April 199815. Obviously, he said so in order to show that the plaintiffs did not previously know about the involvement of the 3rd defendant and Start Orient. But I am unable to accept his evidence. In my view, the plaintiffs requested for the request of the preliminary sale and purchase agreements because they wanted to confirm if Mr She’s side had processed the Project properly. After all, the joint venture partners envisaged that the Project would be completed within six months. Further, by the 23/9/97 Letter [D3 to D1]16, the 3rd defendant said that its clients would directly send the preliminary agreements to the 3rd plaintiff. There had been no follow up inquiry. The only reasonable inference to be drawn, and I so draw, is that the preliminary agreements had been so supplied to the plaintiffs. It does not make sense that the 4th defendant would only supply the preliminary agreements in April 1998. 161.The 16 Letters [D3 to NLLC]17 also showed clearly the involvement of the 3rd defendant and Start Orient. It is Mr Cui’s evidence that he received them from the 4th defendant on 21 May 199818. But his evidence does not bear a closer scrutiny of the copy letters disclosed by the parties. The copies disclosed by the plaintiffs bore the fax number of Mr She : 2143-630219 whereas those disclosed by the 3rd defendant did not bear such fax number. In other words, the plaintiffs’ copies had been faxed to Mr She’s machine and were made from it. The plaintiffs could not have received them from the 3rd defendant. The only reasonable inference that I draw is that the plaintiffs received them in November 1997 probably from Mr She, who had already moved into FEFC Premises, after he had received the same from the 5th defendant by fax20. 8.4 Other contemporaneous evidence 162.The plaintiffs’ evidence that the 1st defendant had been instructed to stakehold the Contributions did not sit well with the other contemporaneous evidence. 163.The first piece of contemporaneous evidence is the Acquisition Formula which, Mr Wang confirmed, the plaintiffs had agreed to as the basis of the joint venture. 164.Mr Aiken objected to the court looking at the Acquisition Formula. He relied on the well-established principle that in construing a written agreement, evidence of negotiations ought not to be received by the court and that evidence should be restricted to evidence of the factual background known to the parties at or before the date of the contract, including evidence of the “genesis” and objectively the “aim” of the transaction : Prenn v. Simmonds [1971] 1 WLR 1381 (HL); Jumbo King Ltd v. faithful Properties Ltd & Ors [1999] 4 HKC 707 (CFA). 165.With respect, the above principle does not assist the plaintiffs because it is not for the purpose of construing the Agreement that the Acquisition Formula is to be considered. Further, the Acquisition Formula provides information on how the Project was to be implemented, including how capital contributions were to be applied. This will no doubt shed light on the instructions that the plaintiffs gave the 1st defendant regarding their contributions. 166.I have set out the terms and effect of the Acquisition Formula in paragraphs 64 to 66 above. Briefly, the joint venture partners envisaged that the capital contributions were to be placed with a law firm (Firm A) that dealt with the acquisition of the units. Upon certain conditions being satisfied, Firm A would release the deposit to the law firm representing the unit owners (Firm B). 167.Firm B, on the evidence before me, was NLLC21. Firm A, according to the plaintiffs’ case, must be the 1st defendant. All the reasons advanced by the plaintiffs as to why it was necessary to pay over their contributions to be stakeheld by the 1st defendant would only make sense if it was Firm A. There is otherwise no credible reason why the plaintiffs had to come up with the capital contributions upfront but would intend them to be just sitting with the 1st defendant. 168.But I have already rejected the plaintiffs’ case that they had instructed the 1st defendant to operate the Project. I have also found that it was the 3rd defendant who dealt with the acquisition of the units on behalf of Start Orient. In other words, Firm A under the Acquisition Formula was in fact the 3rd defendant. Hence, the plaintiffs gave the 1st defendant instructions to forward their capital contributions to the 3rd defendant. 169.The next piece of contemporaneous evidence is the 27/6/97 Letter [D1 to P3]22. By this Letter, the 1st defendant asked for the balance contributions of HK$45,000,000 for them to be forwarded and transferred. It shows clearly that the 1st defendant was not to stakehold the balance contributions. 170.Finally, if the plaintiffs had indeed instructed the 1st defendant to stakehold the Contributions, then the 1st defendant would have been acting in wholesale disregard of such instructions when it made the Transfers to the 3rd defendant. Common sense dictates that the last thing that the 1st defendant would do was to keep theplaintiffs informed of the Transfers. But that was exactly what the 1st defendant did. The Letter 18/6/97 Letter [D1 to P3], which was sent right after the 1st Transfer, reported the matter and enclosed the Official Receipt which expressly described the money as stakeholder money to the 3rd defendant. See also the 3/10/97 Letter [D1 to Ps]. 171.In my view, the contemporaneous evidence shows overwhelmingly that the plaintiffs had not instructed the 1st defendant to stakehold the Contributions. 8.5 The plaintiffs’ subsequent conduct 172.Finally, the plaintiffs’ evidence is flatly contradicted by their own conduct after they had learnt about the Transfers. 173.When the plaintiffs first learnt about the Transfers in September 1997, they did not take any action against the 1st defendant forthwith. Mr Meng said under cross-examination, he took advice from another lawyer friend about the matter and was told that it was the normal practice of Hong Kong lawyers. That is incredible. 174.When the plaintiffs attempted to recover HK$20,000,000 in November 1997, they did not make any complaint against either the 1st defendant or the 3rd defendant. It does not make sense. Mr Meng said that the 2nd defendant asked them to wait for until 3 January 1998, that is, after the six months period under the Agreement expired. And the plaintiffs waited accordingly. But the 2nd defendant had already acted in fragrant disregard of the plaintiffs’ instructions, why would Mr Meng believe him further? Why would the plaintiffs not take action against the 1st defendant or the 3rd defendant right away, especially when they were in need of money? When the deadline was passed, the money that the plaintiffs asked for was not forthcoming, the plaintiffs did not take any action. Again, that is incredible. 175.The Cancellation Agreement, the contents of which Mr Wang had confirmed to be accurate, simply did not support the plaintiffs’ version of the events. 176.During the recovery process, the plaintiffs were still relying on the 1st defendant to pursue the matter against other defendants. It is incredible when it was the 1st defendant’s wrongful transfer that caused their loss in the first place. 177.In the 20/4/98 Letter [Meng to D2]23, Mr Meng said that the problem relating to the plaintiffs’ capital contributions in the Project had adversely affected the 1st defendant’s reputation. But Mr Meng fell short of complaining about the Transfers. That is incredible. 178.Mr Aiken conceded that all the letters written by the 1st defendant to the 3rd defendant during the recovery process were issued with the plaintiffs’ instructions. One of these letters was the 21/4/98 Letter [D1 to D3]24. According to this letter, the plaintiffs would not have instructed the 1st defendant to stakehold the Contributions. 179.In none of these correspondence exchanged between the plaintiffs and the 3rd to 6th defendants during the recovery process was it said that the Transfers to the 3rd defendant were wrongful. Indeed, Mr Wang made no complaint that the Transfers were wrongful at all in the 10/6/98 Letter [P3 to D3 & D4]25. The 4th defendant put forward his own version of the events by the 6/7/98 Letter [D3 to D1]26. There is nothing in the plaintiffs’ correspondence to contradict it. 8.6 Rejecting the stakeholder claim 180.For the above reasons, I find all the plaintiffs’ witnesses poor and unreliable. I reject their evidence as summarised in paragraphs 140 to 143 above. I further rule that the plaintiffs’ evidence is so unsatisfactory that there is no case to answer on the Stakeholder Claim. The Stakeholder Claim must fail and I dismiss it accordingly. It follows that the questions of breach under the Stakeholder Claim and quantum do not arise. 181.Before leaving the Stakeholder Claim, I wish to make one more observation. The evidence of the plaintiffs’ witnesses and the way they gave their evidence left me with the impression that the plaintiffs were laboured under the misconception that as the plaintiffs’ lawyers in respect of the Project, the 1st defendant was responsible for the entire Project and all the loss that they had suffered when it fell through. That is perhaps the reason why they first came up with the Stakeholder Claim and then tried to expand the 1st defendant’ role as guarantor, operator and stakeholder of the entire Project. They have gone over the top. SECTION 9 THE NEGLIGENCE CLAIM 182.I next come to the Negligence Claim. 9.1 What instructions did the plaintiff give the 1st defendant? 183.I need first to ascertain what exactly had the plaintiffs instructed the 1st defendant to do. 184.As noted, 1st defendant had been instructed to draft the Agreement. But obviously the plaintiffs’ instructions were not so limited. The evidence clearly shows, and I so find, that the 1st defendant had been instructed to handle and process the plaintiffs’ contributions to the 7th defendant under the Agreement, including sending the contributions to the 3rd defendant, who acted for the 5th and 6th defendants, the plaintiffs’ joint venture partners. Further, I find that the 1st defendant had been instructed to protect the plaintiffs’ interest in the moneys. That is why it imposed on the 3rd defendant the Undertaking in the 18/6/97 Letter [D1 to D3]27 and the Covering Letters [D1 to D3]28 in respect of each of the Transfers. The position is made beyond doubt by the 27/6/97 Letter [D1 to P3]29 in which the 1st defendant specifically stated that in order to protect the 3rd plaintiff ’s interest, it would impose the Pre-Condition in respect of the 2nd to 6th Transfers. 185.What duties would arise from the above instructions that the plaintiffs gave to the 1st defendant? 9.2 The relevant circumstances 186.The above question has to be answered by reference to the relevant circumstances. The following factors are, in my view, pertinent.
187.The evidence shows that the plaintiffs had previous experience in buying real properties. But it was the first time they engaged in a project of this size and nature. Their officials all came from the Bureau in Hebei Province. And it is not unreasonable to assume that they had certain knowledge and experience in financial matters. But there is no evidence to suggest that they were conversant with the Hong Kong real estate market. In the circumstances, it is only reasonable that they would look to the 1st defendant to protect its interest in the Contributions they made to the 7th defendant. And I so find.
188.There is no evidence to suggest that the 1st defendant was aware of the Acquisition Formula at the time. Indeed, the documents containing the Acquisition Formula was only disclosed upon my order made in the course of the trial. 189.However, the 1st defendant obviously knew the following matters. Under the Agreement, the plaintiffs were the majority shareholder, having control of the board and hence the daily operations of the 7th defendant. The 3rd defendant was acting for the 5th and 6th defendants, the plaintiffs’ joint venture partner in the Project. The 3rd defendant was also acting for the purchaser in connection with the acquisition of the units in Happy Mansion, although it was not aware of the identity of the purchaser being Start Orient until 20 April 1998 when Mr Cui gave a copy of the purported sale and purchase agreement of 12/F of Happy Mansion to Mr Chan. The sale of the units in Happy Mansion would take the form of conditional sale and purchase agreements. Hence the need to impose the Undertaking and the pre-Condition as proposed in the 27/6/97 Letter [D1 to P3].
190.The Contributions were meant to be the plaintiffs’ capital contributions to the 7th defendant. Under Clause 11.3(c) of the Agreement, the contributions were to be processed and settled through law firms practising in Hong Kong. Thus who was then acting for the 7th defendant should be a matter of concern to the 1st defendant when it handled the Contributions. 191.I have already found that there is no evidence to establish the identity of the law firm that acted for the 7th defendant. I also find that there is no credible evidence to enable the 1st defendant to be reasonably satisfied that the 3rd defendant was acting for the 7th defendant when the Transfers were made. There was no board resolution from the 7th defendant to that effect. (In any event, the 3rd defendant could not have acted for the 7th defendant in respect of the 1st Transfer (on 18 June 1997) because the shares in the 7th defendant were not formally transferred to the 3rd plaintiff and the 6th defendant until 3 July 1997.) And the 1st defendant had not come up with any evidence to show that it could be so reasonably satisfied.
192.In my view, the risk that the plaintiffs’ capital contributions to the 7th defendant received by the 3rd defendant who was then acting for the plaintiffs’ joint partners of the Project, namely, the 5th and 6th defendants, might not be utilised in accordance with the plaintiffs’ instructions or in their interest was reasonably foreseeable : see Edward Wong Finance Co. Ltd v. JSM (a firm) [1984] 1 AC 296, per Lord Brightman at p.306F-G. The 1st defendant was obviously aware of such a risk. Otherwise, it would not have imposed the Undertaking or proposed to impose the Pre-Condition on the 3rd defendant. 9.3 The duties entailed and the 1st defendant’s breach 193.In these circumstances, imposing the Undertaking on the 3rd defendant is not sufficient security to protect the plaintiffs’ capital contributions to the 7th defendant. The 1st defendant was under a duty to take possible steps to guard against such risks : Edward Wong Finance, per Lord Brightman at p.307G. That involved at least a duty to advise the plaintiffs properly of the risks involved in sending their contributions to the 3rd defendant and the possibility of other better, safer options to avoid such risks without frustrating the business objectives of the Project. 194.Mr Hoo submitted that a solicitor’s principal advisory obligation does not extend to questions of business : Clark Boyce v. Mouat [1994] 1 AC 428, per Lord Jauncey of Tullichettle at 437D-E. He further submitted that to impose on a solicitor the legal responsibility of answering business questions would require both unequivocal instructions and unqualified acceptance; for it is no part of a solicitor’s normal duty to profess the skill and experience for giving such advice : Yager v. Fishman & Co. and Teff & Teff [1944] 1 All ER 552, per Scott LJ at p.555G. 195.The present case, in my view, does not involve any advice on the commercial wisdom or business questions of the Project or the financial strength of the plaintiffs’ joint venture partners. It involved the risks that the plaintiffs would be exposed if they were to make the capital contributions by forwarding the same to the 3rd defendant in the circumstances that I have identified above. In exercising reasonable professional judgment a solicitor is expected to be alert to risks which might elude an intelligent layman and to advise the client of those risks or explore the matter further : County Personnel Ltd v. Alan R Pulver & Co. (a firm) [1987] 1 WLR 916, per Bingham LJ at p.922D-E. For it is the solicitor and not his client who has the better opportunity to assess the gravity or remoteness of the risks involved in a particular case, and it is the solicitor and not the client who has the necessary expertise to analyse and guard against the risks : see Edward Wong Finance, per Lord Brightman at p.307G. 196.Where a client sues his solicitor for having negligently failed to give him proper advice, he must show :
See Downs v. Chappell [1997] 1 WLR 426, per Millet LJ (as he then was) at p.11B, followed in Bank of China (Hong Kong) Ltd v. Albert Hwang, David Chung & Co. (a firm), unreported, 6 June 2002, [2002] 687 HKCU 1, Deputy Judge Lam (as he then was). 197.On (1), I have already ruled that the 1st defendant should have advised the plaintiffs of the risks involved in sending their capital contributions to the 3rd defendant and the possible steps to avoid such risks without frustrating the business objectives of the Project. Such steps, in my view, include causing the 7th defendant, which was under the plaintiffs’ control, to open a bank account. The plaintiffs’ contributions to the 7th defendants could be deposited with this account. The plaintiffs’ moneys would then be under the plaintiffs’ control through the 7th defendant. They could not be utilised without the plaintiffs’ consent. This would on the one hand fulfil the plaintiffs’ obligations under the Agreement to make contributions to the 7th defendant and, on the other, ensure that their contributions were to be applied in accordance with the business objectives of the Project with the plaintiffs’ consent and under their control. 198.On (2), I am satisfied on a balance of probabilities that had the 1st defendant given such advice to the plaintiffs, they would not have sent their contributions to the 3rd defendant in the way as they had done. Opening a bank account by the 7th defendant was obviously a far better, safer and viable option. 199.The 1st defendant had failed to properly advise the plaintiffs of the above matters or at all. Such failure fell well below the skill and standard required of a reasonably competent solicitor. The 1st defendant is clearly guilty of negligence. And I so find. 200.This is sufficient to dispose of the liability of the Negligence Claim. I do not wish to overburden this judgment. So I will not deal with other particulars of negligence relied on by the plaintiffs except to note one point. In his closing submissions, Mr Aiken sought to rely on other particulars of professional negligence which had not been pleaded. This is, with respect, not permissible. To complete the discussion, Mr Hoo’s no case submission on the Negligence Claim is rejected. 9.4 Quantum 201.On quantum, the plaintiffs had been unable to recover the balance of the Contributions, namely, HK$36,600,000. This balance includes the sum of HK$800,000 kept by the 1st defendant after it had returned HK$400,000 from the HK$1,200,000 that it had retained. This sum of HK$800,000 forms the subject matter of the Residue Claim, which I will deal with in a moment. Thus, on the Negligence Claim, the loss that the plaintiffs had suffered as a result of the 1st defendant’s negligence is HK$(36,600,000 – 800,000) = HK$35,800,000. SECTION 10 THE RESIDUE CLAIM 202.I now come to the Residue Claim. 203.I first look at the sum of HK$500,000 retained by the 1st defendant to defray its fees. Retaining the sum is contrary to the 1st defendant’s own case that the Contributions were to be forwarded to the 3rd defendant. If the 1st defendant wished to retain the sum as costs on account, it should have obtained the plaintiffs’ consent beforehand. But there is simply no evidence to suggest that the 1st defendant had done so or was in any event entitled to retain the sum for such purpose. 204.On the HK$300,000 paid to Mr She, it is again inconsistent with the 1st defendant’s case that it had been instructed to send the Contributions to the 3rd defendant. There is no evidence to show that the 3rd plaintiffs had authorised the 1st defendant to make the payment of HK$300,000 to Mr She either. Further, the 1st defendant’s own document does not support its plea. Its defence alleged that the payment was compensation to Mr She for the opening of office premises for the 7th defendant and employing a person to man the same. But the relevant cheque voucher shows that it was commission for the Project30. So which is which? This clearly calls for an explanation from the 1st defendant but there is none, the 1st defendant having elected not to give evidence. 205.In the circumstances, I find for the plaintiff in the sum of HK$800,000 on the Residue Claim as narrowed. Again, for completeness, Mr Hoo’s no case submission on this Claim is rejected. SECTION 11 THE CLAIM AGAINST THE 3RD DEFENDANT 206.I now come to the plaintiffs’ claims against the 3rd defendant. I first dispose of the two preliminary points raised in counsel’s submissions. 10.1 Who is the proper plaintiff? 207.Mr Lam submitted that only the 3rd plaintiff is the proper plaintiff insofar as the 3rd defendant is concerned. I agree. For the Transfers, received by the 3rd defendant, were meant to be capital contributions the 3rd plaintiff made to the 7th defendant. Only the 3rd plaintiff has the locus to sue for their return from the 3rd defendant. 10.2 Any proper defence filed by Mr Ho? 208.Mr Aiken queried if Mr Ho had filed a proper defence. 209.The 3rd defendant was sued in the name of the firm pursuant to Order 81, rule 1 of the Rules of the High Court. Mr Ho, the 4th defendant and Mr Emerson were named as partners of the 3rd defendant at the material times. Under Order 81, rule 4(1), where persons are sued as partners in the name of their firm, which is the case here, service may not be acknowledged in the name of the firm but only by the partners thereof in their own name. Mr Lam took the view that the original acknowledgment of service filed in the 3rd defendant’s name is inappropriate. He applied for an obtained leave from me for Mr Ho and Mr Emerson to file new acknowledgement of service on 23 April 2004. When the 3rd and 4th defendants were represented, they filed the Joint Defence on 15 February 2000. Mr Ho, now represented by Mr Lam, is entitled to file a new and separate defence but he did not. The Joint Defence remained his defence. And the trial had been conducted on this basis throughout. I am unable to agree with Mr Aiken on this point. 10.3 The pleading point 210.Mr Lam then took a pleading point. 211.He submitted that the plaintiffs’ pleaded cause of action against the 3rd defendant could only succeed if the 18/6/97 Letter [D1 to D3] and the Covering Letters [D1 to D3], which imposed the Undertaking on the 3rd defendant, were issued to the 3rd defendant with the authority of the 3rd plaintiff. However, it is the plaintiffs’ pleaded case is that the Transfers were made without their consent or authority. Mr Wang also confirmed in his oral testimony that the 18/6/97 Letter [D1 to D3] and the Covering Letters [D1 to D3] were all written by the 1st defendant without the plaintiffs’ instruction or authority. The plaintiffs had not pleaded any alternative cause of action against the 3rd defendant to cover the scenario where the court might hold that the Transfers were made with the plaintiffs’ consent and authority. Thus, on their own pleadings, the plaintiffs’ claim must fail. 212.In Poon Hau Kei v. Hsin Chong Construction Co. Ltd & another [2004] 2 HKLRD 442, Bokhary PJ said at para.19 at p.452A-B :
213.It is true that the plaintiffs had not pleaded any alternative case against the 3rd defendant on the basis that the Transfers were made with their consent or authority. But that remains the 1st defendant’s pleaded case. And before the striking out of the sham defence31, it was also the 3rd defendant’s defence. For in paragraph 34 of the Joint Defence, it was alleged that the plaintiffs knew that the capital contributions were meant to be a general-purpose loan. The implication must be that the plaintiffs had consented to the Transfers being made to the 3rd defendant. 214.Further, throughout the trial, Mr Ho has adopted a neutral stance over the factual disputes between the plaintiffs and the 1st defendant, including whether the Transfers were made with the plaintiffs’ knowledge consent and authority. 215.In these circumstances, it would not be unfair for me to determine Mr Ho’s liability on the basis of my earlier finding that the Transfers were made with in accordance with the plaintiffs’ instructions. 10.4 Whether Mr Ho vicariously liable 216.I then turn to the merits of Mr Ho’s defence. 217.The plaintiffs’ claim is essentially based on the Undertaking. In the Joint Defence, it was admitted that the Transfers had been made to the 3rd defendant. The undisputable evidence is that the 3rd defendant was well aware that the Transfers were moneys of the 3rd plaintiff. When each of the 1st to 6th Transfers was made, the 1st defendant had imposed the Undertaking on the 3rd defendant. The 3rd defendant must have accepted the Undertaking. Otherwise, it should have informed the 1st defendant accordingly and returned the moneys. The 3rd defendant is bound by the Undertaking. So is Mr Ho : see generally The Hong Kong Solicitors’ Guide to Professional Conduct Vol. 1, Chapter 14, para.14.01. 218.By accepting the Undertaking, the 3rd defendant owed a duty to the 3rd plaintiff, the principal of the 1st defendant who imposed the Undertaking, to act in accordance with the Undertaking. When the moneys it received by way of the Transfers were dispersed in breach of the Undertaking, the 3rd defendant is liable. So is Mr Ho. 219.Alternatively, Mr Ho is vicariously liable in the following way. 220.Section 12 of the Partnership Ordinance, Cap.38, provides :
221.Two essential conditions must be satisfied under section 12 :
222.On (1), Mr Lam readily accepted that the 4th defendant’s dispersing of the moneys received by virtue of the Transfers constituted a wrongful conduct within the meaning of section 12. 223.On (2), the question of authority does not arise in the present case, the plaintiffs having made no complaint against Mr Ho personally. The only question is whether the wrongful act of the 4th defendant was committed in the ordinary course of the 3rd defendant’s business. Mr Lam submitted that it was not. The 4th defendant was engaging on a frolic of his own. 224.In order to determine what is meant by “acting in the ordinary course of business”, the courts now adopt a “close-connection” test : Dubai Aluminium Co. Ltd v. Salaam [2003] 2 AC 366, per Lord Nicholls at pp.376-378. The “close-connection” test for determining vicarious liability has been adopted by the Court of Final Appeal in Ming An Insurance Co. (HK) Ltd v. Ritz Carlton [2002] 3 HKLRD 844 in the context of employer’s liability. Both Litton NPJ (at p.856G) and Mortimer NPJ (at p.862J) emphasised that the application of the “close-connection” test to the facts of a particular case is a matter of degree. 225.I have already found that the 3rd defendant acted for the 5th and 6th defendants and Start Orient in respect of the Project32. On the evidence, there can be no dispute, and I so find, that the Project was handled by the 4th defendant in the ordinary course of the 3rd defendant’s business. He also handled the moneys received by the 3rd defendant by way of the Transfers. Mr Ho chose not to give evidence to explain why it was the 4th defendant who handled the Project and the moneys. The only reasonable inference to be drawn, and I so draw, is that the 4th defendant had been entrusted and hence authorised to handle the moneys in the course of the 3rd defendant’s business. When he dishonestly dispersed the monies, Mr Ho as his co-partner was vicariously liable. 226.This is sufficient to dispose of the plaintiffs’ claims against Mr Ho. And I do not propose to deal with other contentions raised by Mr Lam. 10.5 Quantum 227.Turning to quantum, Mr Lam accepted that the proper quantum of damages against Mr Ho is HK$36,600,000. I note that the plaintiffs’ claim against Mr Emerson has been settled. But I have not been asked to take that into account when assessing the quantum of damages to be awarded against Mr Ho. I trust I can safely leave this to the parties to be dealt with at the enforcement stage. SECTION 11 ORders & COSTS 228.As against the 1st defendant, I have already dealt with the quantum on the Negligence Claim and the Residue Claim in paragraphs 201 and 205 above. The total loss suffered by the plaintiffs is, therefore HK$36,600,000. Mr Hoo suggested that I should give credit to the proceeds generated by the mortgages relating to the Profit Mansion properties. But as I have pointed out, that transaction is a now a subject matter of another High Court Action. It is more desirable to leave that matter aside for the time being. Accordingly, I will enter judgment against the 1st defendant in favour of the plaintiffs in the sum of HK$36,600,000 with interest at judgment rate from the date of writ until payment. 229.As against Mr Ho, I will enter judgment against him in favour of the 3rd plaintiff in the sum of HK$36,600,000 with interest from the date of writ until payment. 230.The 4th defendant having filed no substantive defence to the 1st plaintiff’s claim on the dishonoured cheque, there will be judgment in favour of the 1st plaintiff against him in the sum of HK$10,000,000 with interest at the judgment rate form the date of writ until payment. 231.The claim against the 5th defendant is on 6 dishonoured cheques issued in favour of the 1st plaintiff. The 5th defendant has not filed any defence. There will be judgment in favour of the 1st plaintiff against the 5th defendant in the sum of HK$30,000,000 with interest from the date of writ until payment. 232.The 6th and 7th defendants have not filed any defence either. There will be judgment against them in favour of the plaintiffs in the sum of HK$36,600,000 with interest at judgment rate from date of writ until payment. 233.Finally, on costs, I agree with the parties that it is a complicated matter. I will therefore invite the parties to agree on costs if possible, failing which they should lodge with court their written submissions on costs 42 days after handing down of this judgment. If necessary, I will ask the parties to make further oral submissions.
Mr Kenneth Kwok, SC, Mr Kenneth Chow, and Mr Samuel Wong Mr Kenneth Chow and Mr Samuel Wong Mr Nigel Aiken, SC, Mr Kenneth Chow and Mr Samuel Wong Mr Alan Hoo, SC and Mr Alfred Chan, instructed by Messrs Stephenson Harwood & Lo (between 3 May and 9 September 2004); and Messrs Livasiri & Co. (between 10 September 2004 and 25 January 2005), for the 1st Defendant Mr H. Lam of Messrs Lo, Wong & Tsui, for the 2nd Defendant Mr Paul Lam, instructed by Messrs Richards Butler, for the 3rd Defendant 1 On 18/6/97, 10/7/97 and 11/7/97, the actual amounts applied for remittance were respectively HK$5,000,000, HK$3,800,000 and HK$4,700,300. But the amount actually received by the 1st defendant was on each occasion HK$100 short because for each bank remittance, the bank charged HK$100 as handling charge, totaling HK$300. The HK$300 added to the remittance of HK$4,700,000 on 11/7/97 made up for the total shortfall. 2 The Acquisition Formula was drafted in Chinese, which read : “方案是以港幣 70,000,000.00作收購訂金，由我方公司與貴公司簽訂收購合約，在六個月內動用資金作全面收購，六個月內若不能收購成功，資金會全數退回，該款項將放於律師樓內，每次動用該款項時，我司必需交出有效之「有條件買賣合約」予律師樓批核方可發放訂金，而每筆訂金皆可在不能全面收購時，六個月內或之前退回律師樓，而小業主之律師樓在法律上要自動承擔此柒仟萬元訂金，實為總地價貳億陸仟萬元之約27%。收購會用「有條件合約」方式收購，即每伙每戶業主均同意出售物業方可正式由律師事務處取得訂金，否則所有訂金均由律師看管，不能動用。 在順利全面成功收購後，會同時訂立法律文件在指定時間內完成交易，交易期要在收購時再確定，估計由簽訂臨時有條件合約內計起，最多不超過六個月完成交易。(香港房地產之買賣合約、訂金之管理及發放一直以來皆依賴律師樓的管理，制訂及操作，而律師的責任是由香港政府法例管制)” 3 The Agreement was drafted in Chinese. The summary is taken from the English translation. 4 The Cancellation Agreement was drafted in Chinese. The terms set out below are taken from its English translation. 5 Paragraph 101 above. 6 Paragraph 119 above. 7 Paragraph 60 above. 8 Paragraph 68 above. 9 Paragraphs 96 to 102 above. 10 Paragraphs 112 to 119 above. 11 Paragraph 94 above. 12 Paragraph 87 above. 13 Paragraph 91 above. 14 Paragraph 98 above. 15 Paragraph 114 above. 16 Paragraph 99 above. 17 Paragraph 101 above. 18 Paragraph 116 above. 19 Paragraph 93 above. 20 Paragraph 102 above. 21 Paragraph 124 above. 22 Paragraph 89 above. 23 Paragraph 115 above. 24 Paragraph 114 above. 25 Paragraph 118 above. 26 Paragraph 119 above. 27 Paragraph 86 above. 28 Paragraph 91 above. 29 Paragraph 89 above. 30 Paragraph 94 above. 31 Paragraph 34 above. 32 Paragraphs 125 to 127. Appeal by 1st Defendant allowed and appeal by 3rd Defedant dismissed: see CACV397/2005 and CACV401/2005 dated 22 June 2007 |
Cases cited in this judgment
Further hearings and rulings under HCA 20094/1998