Heibei Enterprises Ltd and Others v. Livasiri & Co (A Firm) and Others
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cacv 397/2005 AND CACV 401/2005 in the high court of the hong kong special administrative region court of appeal civil appeal no S. 397 of 2005 AND 401 OF 2005 (on appeal from hca NO. 20094 of 1998) ______________________ BETWEEN
Before: Hon Rogers VP, Le Pichon JA and Hartmann J in Court Dates of Hearing: 11-12 June 2007 Date of Handing Down Judgment: 22 June 2007 ______________________ J U D G M E N T ______________________ Hon Rogers VP: 1.These were two appeals from a judgment of Deputy High Court Judge Poon given on 4 November 2005. In the action the plaintiffs sought to recover monies which they had put up in furtherance of a joint venture project aimed at the redevelopment of premises in Happy Valley. Although the action was brought against other parties against whom judgment was obtained, these were appeals by the first and third defendants who were firms of solicitors, the partners of which were sued under the partnership name. The judge gave judgment against both the first and third defendants in the sum of $36,600,000 with interest. 2.Significantly, however, the order as to costs was that the plaintiffs should pay 75% of the first defendant’s costs of the action and that the first defendant should pay 25% of the plaintiff’s costs whereas in respect of the third defendant the remaining partner of the third defendant was ordered to pay 10% of the third plaintiff’s costs of the action. That unusual form of order is, we understand, the subject of a separate appeal and hence the reasons therefor were not canvassed but it would seem that the judge made that order on account of the fact that the he had disbelieved the plaintiffs’ witnesses and in the light of the fact that their evidence had taken up all but a small part of the more than 100 days that the trial took. Clearly the judge considered that the plaintiffs should bear the brunt of the costs. 3.At the conclusion of the hearing of this appeal, judgment was reserved which we now give. Background 4.One of the curious features of this case is that the only oral evidence was given by the plaintiffs’ witnesses. There were three witnesses in all. Because the veracity of the evidence was challenged the judge ordered that the witness statements should not stand as evidence in chief but he heard the oral evidence in full. Although there are transcripts of all 102 days of the trial this court was only shown small parts of them and, indeed, indicated to the parties that there were difficulties in relying on the transcripts of the oral evidence of the three plaintiffs’ witnesses since the judge clearly disbelieved large and important parts of their evidence. In those circumstances the judge attempted to piece together the crucial events which gave rise to this action largely from the contemporaneous documents. In so far as he relied on the evidence of the plaintiffs’ witnesses it was in respect of very specific matters. 5.The other curious feature of the case is that there was no oral evidence given by partners or solicitors of the first or third defendants. It appears that at the trial, flushed with what was, apparently, a clear success in discrediting the plaintiffs’ witnesses, those conducting the case of behalf of the first and third defendants took the view that they should submit that there was no case to answer. Such a procedure is, of course, common in criminal proceedings. It is not a procedure known in civil proceedings and its adoption in this case has, perhaps, led to at least the necessity for an appeal by the first defendant. 6.In the present circumstances and given the findings by the judge as to the credibility of the plaintiffs’ witnesses I consider that the correct, and indeed only, course open to this court is to consider carefully the findings of fact made by the judge. 7.One further matter which may be observed at the outset is that Ms Livasiri, who was a partner of the first defendant at the relevant time but had ceased to be a partner in 1999, sought to be represented on this appeal. That was resisted by counsel on behalf of the plaintiffs despite the fact that he made clear that it was the plaintiffs’ intention to pursue any claim for damages against Ms Livasiri personally. In those circumstances it was indicated to counsel that this court considered it would be unjust to refuse audience to a party to the proceedings who was to be made personally liable. Following the court’s indication, the objection to the appearance of counsel on behalf of Ms Livasiri was not pursued. 8.The plaintiffs are investment companies set up by the provincial government in the Mainland and have sometimes been referred to as “window” companies. 9.The judge found that in October 1996 the second defendant, who was and still is a partner of the first defendant, was introduced to Mr Wang Guangtian (“Mr Wang”), who was apparently responsible for the daily operations of the plaintiffs in Hong Kong. After that the third plaintiff appointed the first defendant as its solicitors when it acquired an upper floor in Far East Finance Centre in November 1996 for a sum of more than $69 million. 10.Later, the second defendant introduced Mr Wang to a Mr She. The judge said at paragraph 58 of the judgment that discussions then ensued about acquiring the premises in Happy Valley, namely Happy Mansion at 60-62 Village Road, in respect of which a plan had been conceived. It appears from the judgment that Mr She was acting for a Mr Simon Cheng Kwok Fai who owned and controlled the fifth defendant and its subsidiary the sixth defendant. From about 12 May to 4 June Mr She and Mr Wang had discussions about the Happy Valley project. Mr Wang kept a Mr Meng, who was the Deputy Head of the Finance Bureau of the Hebei Provincial Government (“the Bureau”) informed about the matter. At some stage Mr She produced what was referred to as the “Acquisition Formula”. There was more than one version of it but the final version as set out in the judgment was as follows:
11.The judge considered, amongst other things, that the acquisition deposit would be placed with what he termed as law firm A and that there would be another law firm, law firm B, who would represent the owners of the flats. In that respect I see no ground for disputing the judge’s finding. 12.Apparently on 10 June 1997 Mr Meng came to Hong Kong and had a meeting with Mr Wang, Mr She and the second defendant on 13 June 1997. After that meeting, Mr Meng faxed a letter dated 13 June 1997 to Mr Yan, the head of the Bureau outlining the project in which the plaintiffs would be putting up capital of $50 million and receive a 60% holding whereas that the joint venture partner, which was named as Jihe Zhidi Company, would hold 40%. The project was said to be viable to the extent that there was a 90% probability that the premises would be purchased by a named bank. The project was said to be likely to generate a profit of $20 million. Importantly for the purposes of this case it is stated in a letter that:
13.The plaintiffs sought in their Reply to allege that the second defendant had indeed guaranteed that the first defendant would be responsible for and control the project. However, in paragraphs 132-4, the judge emphatically rejected the plaintiffs’ case on the alleged guarantees. 14.Two other matters are important as regards the events up to this stage. The first is that the first and second defendants were never shown or given a copy of the Acquisition Formula. Indeed, it would appear that after the initial introduction of Mr Wang to Mr She the second defendant was not engaged in any of the discussions between the two parties until the meeting on 13 June. Furthermore as the judge held in paragraph 134:
15.As noted above, on 13 June 1997, there was a meeting which was attended by Mr Meng, Mr Wang, Mr She and the second defendant. It is not clear whether Mr Kelvin Chan, an assistant solicitor in the first defendant firm, was also present. Suffice it to say however that the judge recorded at paragraph 67 of the judgment that the second defendant advised that a joint venture company should be set up for the purpose of the project. 16.It was after that meeting that Mr Meng faxed the letter to Mr Yan seeking his approval to enter the project and that same afternoon Mr Yan gave his approval for the plaintiffs to participate in the project. Again the judge recorded, this time at paragraph 69, that Mr Yan directed that arrangement be made for the remittance of the $5 million requested. 17.On the following day 14 June 1997, a Saturday, Mr Kelvin Chan faxed the first draft of the shareholders’ agreement to the third plaintiff for the attention of Mr Meng. The covering letter thanked the recipient for the instructions to prepare the shareholders’ agreement and invited any comments to be referred back to Mr Kelvin Chan himself. 18.There was then a meeting held at the first defendant’s offices on Monday 16 June 1997. It was attended by Mr Meng, Mr Wang, Mr She, the second defendant and Mr Kelvin Chan. Whether or not Mr Cui also attended is probably immaterial. It is quite possible he was not because a copy of his identity card had to be requested after the meeting. One thing is clear, however, that it was Mr Kelvin Chan who explained the joint-venture agreement to the parties. Although the joint venture agreement was signed on that day it was left undated. It was not until the shares in the joint venture company, namely the seventh defendant, were transferred to the third plaintiff and the sixth defendant respectively on 3 July 1997 that the agreement was then dated. 19.The parties to the agreement were to be the third plaintiff and the sixth defendant. The third plaintiff was to hold 70% of the seventh defendant, which was described as being a new company, and the sixth defendant was to have 30% of the joint venture company, the seventh defendant. Paragraph 2.1 of the agreement provided that unless there was a written consent of all parties the only business of the seventh defendant would be in relation to what was termed the Happy Valley Project which is defined in the agreement as being the property project in respect of numbers 60-62 Village Road, Happy Valley which was to be acquired and developed. As with all companies the company was to be controlled by its directors. Under clause 6.1 the third plaintiff was entitled to nominate two directors which it did by nominating Mr Wang and Mr Cui, his assistant. The sixth defendant was entitled to nominate one director which it did by nominating Mr She. The agreement provided that the third plaintiff should provide capital in the ratio of 70% namely $50 million and the sixth defendant should provide capital of $21.5 million which was recorded as being 30%. Importantly in paragraph 11.3(c) it was provided that:
20.Whilst clause 2.2 provided that the parties should use their best endeavours to complete the project within six months, clause 12.2 provided that the sixth defendant guaranteed to the third plaintiff that should the joint venture company be unable to realise and complete the project within six months the third plaintiff should be entitled to demand that the loan interest owed by the joint venture company to the sixth defendant should be given lower priority than the loan capital and loan interest owed by the company to the third plaintiff. Furthermore if the third plaintiff did not receive the full amount of the loan capital and loan interest within 14 days after they had demanded it from the joint venture company the sixth defendant would immediately pay the outstanding difference to the third plaintiff unconditionally provided that the maximum amount of guarantee provided by the sixth defendant would not been more than the loan interest amount owed by the joint venture company to the third plaintiff. 21.It is then apparent that nearly everything that was done by the first defendant was done by Mr Kelvin Chan and not the second defendant. On the same day the first defendant under a reference which would apparently be that of Mr Kelvin Chan billed the seventh defendant for the cost of acquiring a shelf company and preparing the various documents required for the allotment and issue of the shares and the appointment of the directors. 22.On the same day the first defendant sent the third plaintiff a letter written by Mr Chan in the following terms:
23.There was an outward remittance of $5 million for the benefit of the first defendant on the same day. On 18 June 1997 the first defendant, again by Mr Chan, wrote to the third defendant attention the fourth defendant in the following terms:
24.On the same day Mr Chan wrote on behalf of the first defendant to the third plaintiff confirming receipt of the amount of HK$4,999,900 and enclosing a receipt. The letter continued:
25.On 27 June 1997 there was another letter from the first defendant, written by Mr Chan, to the third plaintiff attention Mr Wang and Mr Cui. This referred to the first defendant having received the documents in relation to the seventh defendant from the plaintiffs and it was said that the relevant documents would be registered as soon as possible. The letter then went on to say that enquiries had been made of Mr She about the progress of the project and that Mr She had said that he had held a meeting with the owners of the flats who had agreed to sell their flats. The letter then went on:
26.Over the course of the next month or so the first and third plaintiffs sent various sums of money totalling $43 million to the first defendant. Some of those transfers were by bank remittance and others by cheque. The judge found that HK$41,800,000 of that sum was transferred by the first defendant to the third defendant. There was a covering letter for each payment to the third defendant. Those covering letters were not copied to the plaintiffs until 3 October 1997. As the judge noted, the precondition referred to in the letter of 27 June 1997 was not contained in the covering letters. Those letters appear to have been in standard form and, apart from a very minor difference in wording, were identical to the letter of 18 June 1997 enclosing the first payment of HK$5 million. 27.On 16 September 1997 the third plaintiff wrote to the third defendant requesting confirmation of an outstanding balance as of 30 June 1997 for audit purposes. The relevant part of that letter read:
28.As recorded by the judge, for some reason the plaintiffs initially disputed authenticity of this letter. It was, eventually, however agreed to be genuine. 29.As the judge recorded at paragraph 96 of the judgment, on 27 August 1997 Mr She wrote to Mr Wang reporting on the purported progress of the acquisition of the Happy Valley property. As the judge said, he painted a rosy picture. The letter said that although some of the owners were apparently seeking an increase in the amount to be paid they were all prepared to sell. Furthermore, discussions had been held with several groups about the sale. It was said that the project would be completed successfully. 30.On 20 September 1997 the first defendant wrote to the third defendant requesting, on the third plaintiff’s instructions, copies of the duly signed preliminary agreements for sale and purchase in respect of the units in the Happy Valley property. The letter was copied to the third plaintiff. That letter was met with the response that the third defendant had reminded its client to send the duly signed preliminary agreements to the plaintiffs who would be delivering them directly to the third plaintiff. 31.In a letter to Mr Meng dated 17 October 1997 Mr She again painted a rosy picture. He said that other than two units, negotiations with all the other owners had been successful. The letter continued that the conditional sale and purchase agreements should be signed within the next 10 days. A suggestion was made that the properties should be sold on immediately in order to save stamp duty. 32.It is a fact that in the last quarter of October 1997 the Asian financial crisis started. It is possibly the onset of that crisis which eventually put the fourth, fifth and sixth defendants into financial difficulties which led to the plaintiffs’ funds being irrecoverable. 33.On 15 November 1997 the third defendant faxed copies of 16 letters to the fifth defendant. Those letters had been written to another solicitors firm Ng, Lie, Lai and Chan (“NLLC”). They had been in standard form. This stated that the third defendant acted for yet another company, Start Orient Ltd, which would be the intended purchaser of the various units in the Happy Valley property. A cheque was said to be enclosed with each of those letters for the purchase price together with engrossments of the formal agreements for the sale and purchase of the various units. The cheques were sent against NLLC’s undertaking not to release the same to their client until they had received the third defendant’s written confirmation that all the 25 unit owners of the property had agreed to sell to Start Orient Ltd. It should be noted that the plaintiffs dispute the authenticity of some of those letters because it emerged that NLLC had not received instructions from all the parties in respect of whom the letters were addressed. 34.Shortly thereafter the plaintiffs were in need of capital and asked Mr She for the return of some $20 million from the plaintiffs’ capital contribution to the seventh defendant. Mr She wrote back to Mr Meng saying that the deposits had been formally paid in the sum of more than $67 million. It was said that five units were still waiting for release of the deposit by Mr She’s side. It was said that because of the financial crisis that had commenced in October a buyer had still to be found. It was then said that although Mr She’s side had learnt of the plaintiff’s request for $20 million to be returned before 15 December 1997 that had proved impossible. 35.It was after that that the whole project fell apart and the plaintiffs required the repayment of their capital. As part of the process what was referred to as a Cancellation Agreement was prepared and the judge summarised the important parts of that in paragraph 109 of the judgment as follows:
36.The Cancellation Agreement was duly signed by the parties in or about March or April 1998. There then followed what the judge referred to as the recovery process. That can be summarised as futile attempts by the plaintiffs between March and November 1998 to recover their capital contributions. Quite briefly, it appears from a statement of account of the third defendant in respect of the seventh defendant that there were various payments out of that account from moneys provided via the first defendant not only to other firms of solicitors but to other persons and entities. In short the money was all dissipated probably as early as September 1997. 37.The responsibility for the dissipation is laid at the door of the fourth defendant who was convicted in October 2000 on his own plea of guilty to 10 charges of obtaining pecuniary advantage by deception and one charge of theft arising from a number of sizeable fraudulent transactions. The judge recorded in paragraph 9 of his judgment that the summary of facts prepared by the prosecution in those proceedings showed that the Happy Valley project was an event leading to one of the fraudulent transactions but was not the subject matter of any of the charges which had been laid against the fourth defendant. 38.The judge held, not surprisingly, that NLLC had acted for at least some of the unit owners of the Happy Valley property. Likewise he held that the third defendant acted for the fifth and sixth defendants as well as for Start Orient Ltd, which, if anything, appears to have been acting as an agent for the seventh defendant in the purchase or purported purchase of the Happy Valley properties. 39.The judge rejected the thrust of the plaintiffs’ case and their oral evidence that the project had been entrusted to the first defendant and that the first defendant would be responsible for the operation of the project including finding a buyer for the sub-sales of the units and guaranteeing the safety of the plaintiffs’ capital contributions. He roundly rejected that and he held that the project was managed by Mr She’s side’s companies including the fifth and sixth defendants and Start Orient Ltd assisted by the third defendant. 40.In paragraphs 139-181 of the judgment the judge considered the next claim by the plaintiffs that the first defendant was and should have been the stakeholder of their contributions. For sound reasons he came to the conclusion that not only were the plaintiffs well aware of the fact that their contributions were remitted by the first defendant to the third defendant but that they had instructed the first defendant to so remit the monies. The judge did not hold that the first defendant was acting on behalf of the seventh defendant and although it appears from what is said in paragraph 149 of the judgment that the judge considered that there was validity in the statement in the Cancellation Agreement that the third defendant was the lawyer for the “acquisition project”, the judge went no further than that. Nevertheless, the judge held that the plaintiffs had given the first defendant instructions to forward their capital contributions to the third defendant. The judge drew some comfort that his conclusion was correct by cross reference to what was said in the Acquisition Formula, since the third defendant was the firm A referred to in the Acquisition Formula. The judge rejected the plaintiffs’ claim that was categorised as the stakeholder claim. 41.The judge however held that the first defendant had been negligent in failing to take steps to guard against the risk that the plaintiffs’ capital contributions might not be utilised in accordance with the plaintiffs’ instructions. He said in paragraphs 192 and 193:
42.The judge went on in paragraph 197 to say that the first defendant should have advised the plaintiff to cause the seventh defendant, which was under the plaintiffs’ control, to open a bank account. The plaintiffs’ contributions could then have been deposited into that account and the money would then have been under the plaintiffs’ control. It was said that had the advice been given the plaintiffs would probably not have sent their contributions to the third defendant in the way that they had done. 43.The final aspect of the claim against the first defendant was in respect of the sum of $800,000. $500,000 had been retained by the first defendant to defray its fees. The other $300,000 had been paid to Mr She. The judge held that the first defendant had not been entitled to retain the sum in respect of its fees short of having a concluded agreement to that effect. In respect of the payment made to Mr She there appeared to be no justification for it. 44.As regards the third defendant, the defence which was raised was that the pleadings and oral testimony of the plaintiffs were that the various letters written by the first defendant to the third defendant requiring the undertaking not to part with the money without consent had been written without the plaintiffs’ instruction or authority. It was said that the plaintiffs had not pleaded any alternative cause of action against the third defendant and hence the action who was bound to fail. 45.The judge held that the matter was covered, in any event, by the first defendant’s defence and since the third defendant had, throughout the trial, adopted a neutral stance with regard to the factual disputes between the plaintiffs and the first defendant, it was open to the court to hold that the transfers had been made in accordance with the plaintiffs’ instructions. 46.The other matter of defence raised was that the remaining partner of the firm, namely Mr Ho, was not vicariously responsible for the acts committed by his partner. The judge dismissed that on the basis that what the third defendant had been doing had been within the ordinary course of business namely receiving monies on account for the purposes of purchasing the Happy Valley properties. This appeal 47.The major point taken on this appeal on behalf of the first defendant was that the first defendant had, on the judge’s findings, acted entirely in accordance with instructions. It was said that the judge’s reliance upon the decision in the Privy Council in Edward Wong Finance Co. Limited v JSM (a firm) [1984] 1 AC 296 was misplaced to the effect that it was not, of itself, negligent for a solicitor to accept an undertaking from another firm of solicitors. Indeed, in that case it had been argued on behalf of the successful appellant that the negligence lay in the solicitor having paid money to discharge a mortgage not to the mortgagee or his solicitor but to the vendor’s solicitors. Had the money been paid to solicitors acting for the mortgagee the purchaser would have obtained at least an equitable interest which could have been enforced by specific performance. This was adopted in the passage in Lord Brightman’s advice reported at 307H-308B:
48.Relying on this proposition, which was echoed in the judgment of Millett LJ (as he then was) in the case of National Home Loans Corporation Plc v Kaufmann, judgment 21 June 1995, Mr Anson Wong, who appeared on behalf of Ms Livasiri, in particular and Mr Clifford Smith SC, who appeared on behalf of the first defendant, argued that it was not negligent on the part of a solicitor to take a reasonable undertaking from another firm of solicitors when monies were transferred in accordance with instructions. The matter turned on a question of authorisation and not, as such, on a risk that it had to be assumed that another firm of solicitors would be negligent, or indeed, fraudulent. 49.In this case it is clear that the third defendant was acting on the instructions of the fifth and sixth defendants and those companies were in control of the Happy Valley project. It was clear that the capital contribution in the way of loans provided by the plaintiffs was to be used for the purchase of the Happy Valley properties and for no other purpose. Whether or not monies went into an account in the name of the seventh defendant was immaterial. It would have had to have been transferred to the third defendant for the purpose of making the purchases. The judge was entirely justified in deriving comfort, as he did, as to the conclusion that the plaintiffs had intended the monies to be transferred to the third defendant by relying upon the Acquisition Formula. 50.In view of the fact that the purchases of the various flats and the need for the purchase monies to be available seemed to be imminent and that the transfer of the shares in the seventh defendant and the formal appointment of the directors did not take place until early July 1997 the suggestion by the judge that a bank account should have been opened in the name of the seventh defendant and that was the only reasonable way of the plaintiffs proceeding was not a valid criticism of the first defendant. The opening of an extra bank account would, in my view, have been an unnecessary step and would not have achieved anything. 51.In those circumstances I would allow the first defendant’s appeal against the finding of negligence and it follows from that that the cross appeal in respect of the stakeholder claim against the first defendant must also fail. 52.The issue taken on appeal on behalf of the third defendant was similar to that taken at trial namely that the plaintiffs had not pleaded that the undertakings not to dispose of the monies had been extracted on behalf of the plaintiffs but had pleaded that the transfers of money had been unauthorised. In my view Mr Wong SC, who appeared on behalf of the plaintiffs, was correct when he said that the pleadings, in so far as they relied upon the various letters which were sent with the payments, were sufficient to allow the plaintiff to raise the case in the alternative. Taken to its logical conclusion, the third defendant’s case must be that the monies were monies of the seventh defendant being part of the seventh defendant’s capital, albeit provided by the plaintiffs. In my view that is incorrect. The monies were provided by the plaintiffs and intended to be used when authorisation was given automatically as capital of the seventh defendant and immediately applied for their use in relation to the purchase of the Happy Valley properties. Since that authorisation was never given it remained monies that had been transferred to the third defendant on the authority of the plaintiffs pending proper authorisation. 53.In my view, the appeal by the third defendant has to be dismissed. 54.I would therefore allow the first defendant’s appeal and set aside the judgment in respect of negligence against the first defendant with an order nisi of costs here and 98% of their costs below. There will be an order nisi that Ms Livasiri should have her costs. The claim under the residuary claim was not argued on this appeal and it clearly occupied only a minimal amount of time in comparison with the rest of claim in the court below. I would also dismiss the appeal by the third defendant with an order nisi of costs in favour of the plaintiffs in this court. Hon Le Pichon JA: 55.I agree. Hon Hartmann J: 56.I agree.
Mr Ronny F H Wong SC & Mr Lawrence Cheung, instructed by Messrs Leung, Chan & Pang, for the 1st to 3rd Plaintiffs/Respondents Mr Clifford Smith SC, instructed by Messrs Livasiri & Co., for Mr David Fan of the 1st Defendant/Appellant in CACV 401/2005 Mr Anson M K Wong, instructed by Messrs William W.L. Fan & Co., for Ms Ankana Livasiri of the 1st Defendant/Appellant in CACV 401/2005 Mr Neville Sarony SC & Mr Brian C W Wong, instructed by Messrs Burke, Fung & Li, for Mr Pat Bobby Ying Ho of the 3rd Defendant/Appellant in CACV 397/2005 Plaintiff's appeal allowed and 3rd Defendant's appeal dismissed: see FACV23/2007 dated 15 July 2008 |
Cases cited in this judgment
Further hearings and rulings under CACV 397/2005