New Training Professional Ltd v. China Rare Earth Holdings Ltd
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HCA 930/2007 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF FIRST INSTANCE ACTION NO. 930 OF 2007 ----------------------
---------------------- Before: Deputy High Court Judge L. Chan in Court Dates of Hearing: 12-14 and 16 January 2009 Date of Judgment: 6 May 2009 ---------------------- J U D G M E N T ---------------------- 1.The plaintiff claims damages for loss of a chance to earn the liquidated sum in a consultancy contract with the defendant. It also claims the payment of a deposit of US$20,000 under the contract and a sum of HK$670,000 as wasted expenditure. The defendant conceded on liability on the 1st day of the trial, but disputed quantum. The Plaintiff’s Evidence on Quantum 2.The plaintiff is a company that is in the business of, among other things, providing financial consultancy service. The defendant is a company listed in the Hong Kong Stock Exchange. 3.In about August 2005, the Defendant planned to raise a loan of US$20 million from one East Asia GE Commercial Finance Limited (hereinafter called “GE”), a member of the GE Group of the USA. One of the terms of lending required the defendant to provide a letter of guarantee for the loan. The letter had to be issued by a bank or financial institution acceptable to GE. Since all the defendant’s assets were in the Mainland, no bank or financial institution in Hong Kong was willing to act as the guarantor and issue the letter. The defendant therefore turned to the Mainland for the guarantor. 4.The defendant was, however, unsuccessful in its search for the guarantor and that delayed the processing of the loan. One Ms Cheng, a Vice-President of GE, then introduced the defendant to the plaintiff for help. 5.According to the plaintiff’s witness Mr Wu, Cheng had in August 2005 requested him to look for the guarantor for the defendant. Cheng asked Wu to do so initially on a friendly basis. She further told Wu that if his initial research and investigation would show that a guarantor could indeed be found in the Mainland, she could arrange the defendant to sign a consultancy contract with the plaintiff and to retrospectively recognise all the plaintiff’s work. Wu then started working on this task. He set out the work he did for this task in both his witness statement and a list of costs or expenditure incurred by the plaintiff. 6.After meeting Cheng on 31 August 2005, he thought he could not handle the task alone. He therefore listed it as a project of the plaintiff. He also allocated two consultants to form a working group with him to work on the task. 7.Despite the lack of any contract with the defendant, the plaintiff started working on the project rather seriously. Wu said that the working group had met on 5 and 6 September. They found the task not an easy one. They had to make sure that the issue of the letter of guarantee had no conflict with the laws of the Mainland. There were laws that regulate the import of capital. The influx of capital to some special trades was also subject to control. 8.After working on the project on 5 and 6 September, the working group went to Beijing on 7 to 9 September to meet the officials of the Finance Research Institute of the Development Research Centre under the State Department and the experts and academics of the Central Finance and Economics University and Tsing Hua University. The meetings considered the feasibility of guaranteeing the lending. The plaintiff’s consultants also conducted library research on 9 and 15 September. 9.However, Wu did not provide any particulars of the people he met, the issues discussed and the conclusions arrived at. He tried to justify the non-disclosure on the ground that the information was the plaintiff’s commercial secret. He also provided no clue as to what sort of research had been conducted and the result obtained. He only said that after three days of discussion and research, he concluded that the proposed guarantee for the lending was permissible under the laws of the Mainland, but the details of implementation were not as simple as Cheng had initially contemplated. He did not spell out what complications there were. 10.His evidence also showed that the plaintiff was not merely investing its human resources into the project. It also spent $15,300 for the return flight and accommodation of Wu and his consultants. The plaintiff incurred all these monies before there was any contract and before knowing if the proposed guarantee arrangement was legally permissible. If the arrangement should turnout to be impermissible, the plaintiff would suffer the loss of these expenses apart from not getting any fees for the work done. 11.Wu then met Cheng on 16 September and he gave Cheng a full account of the information obtained between 7 to 9 September. He also told her that he needed more advice from financial legal experts. 12.Between September and November, the plaintiff through a working partner searched for similar arrangements in the Mainland with a view to find out the mode of execution. But Wu did not say whether any such case was found. He also gave no particulars as to what was discussed and what research was done or result obtained. There was then no activity from 21 September onwards until 17 October when the consultants did some more research. After this, there was inactivity again until 14 November when he and a consultant went to Zhongshan University in Guangzhou for an expert meeting. 13.The legal experts in Zhongshan University suggested that they should discuss the matter with the monitoring department of the Government. At the same time, they should also contact individual banks to understand the theoretical and practical aspects of the task and to consider how it could be approached. The consultants did further research on 28 November. 14.Up to this point, the expenditure list shows a total charge of $192,300 of which $17,300 was expenditure incurred for the transportation and accommodation. 15.Though Wu provided no particulars of what he had achieved, he did say in his witness statement that he had continuously reported the progress to Cheng by phone. He also sought to meet the defendant’s representatives. However, Cheng said that the defendant’s representatives were aware of what the plaintiff had done, but were too busy to meet him. 16.Wu met Cheng on 3 December again and told her how difficult the task was and that the amount of work far exceeded his initial estimate. He further said that he could not continue working on the task on a friendly basis. He asked for a contract to regularise the relationship with the defendant. There was then another project meeting between Wu and his consultants on 5 December. 17.Despite the absence of any agreement and Wu not having met anyone from the defendant, Wu continued with the project and went to Guangzhou with his consultants. They met the representatives of Guangdong Development Bank and Industrial and Commercial Bank on 6 December. They discussed the feasibility of the guarantee arrangement. However, these banks declined from being the guarantor. 18.Wu went to Shenzhen and met the representatives of the Central Finance and Trust Properties Management Company Limited on 7 and 12 December. On 15 December, his consultants did further research. 19.He met Cheng again on 16 December to discuss the request by the Central Finance and Trust Properties for information on the defendant. He and a consultant had a further meeting with the representatives of this company on 19 December. But nothing came out of it. 20.He had another project meeting with his consultants on 22 December. The meeting refreshed the working proposal because he said the new situations of the defendant and the lender dictated new requirements for the guarantor. But he did not elaborate. 21.He and the two consultants then met the representatives of the Farmer’s Bank on 27 December. Again, nothing developed from this. 22.He and a consultant went to Beijing again on 28 December. They met the academics, experts and officials of the Central Finance and Economics University, the People’s Bank of China and the Commission for Supervision of Banks. They discussed the feasibility of the guarantee scheme. These people considered that the provision of a guarantee was permissible under the laws. He was however advised to enquire with the Department of Foreign Exchange. 23.He reported the advice of the meeting to Cheng on 7 January 2006. Cheng again hurried him with the finding of the guarantor as the defendant wanted to obtain the loan urgently. 24.On 19 January, Cheng told him to prepare a consultancy contract to be made with the defendant. Cheng said the fees to be charged by the plaintiff would be based on market practice. 25.On 8 and 9 February, he and Cheng met the representatives of China Everbright Bank and China Merchant Bank (hereinafter called “the Merchant Bank”) respectively. Only the Merchant Bank showed interest in being the guarantor, but the Bank wanted to discuss with the defendant on the terms and conditions. 26.Wu then e-mailed the draft consultancy contract to the defendant to which the defendant agreed. 27.On 16 February, Wu met one Mr Chen, the officer-in-charge of the Shenzhen Branch of the Merchant Bank. The two of them then met Cheng and one Madam Qian, the defendant’s Deputy Managing Director. Qian confirmed to him that Cheng had all along been the defendant’s representative in her dealings with the plaintiff and Qian was aware of all the work done by the plaintiff since August 2005. 28.Qian also briefly introduced the defendant’s operation and assets to Chen. Chen expressed that the guarantee arrangement was feasible subject to the question of fees. 29.On 17 February, Wu and Qian signed the consultancy contract. The fees were agreed at 1% of the loan or US$200,000. They were to be paid in two stages. The first payment was a deposit of US$20,000. It was to be paid before 25 February. The balance of US$180,000 was to be paid within five working days after the defendant has entered into a contract with the guarantor. 30.However, on 18 February, Qian sent him an email proposing changes to the payment terms. Qian wanted to reduce the deposit to US$5,000 and defer the final payment of US$200,000 to within five working days after the receipt of the loan from the lender. The total payment including deposit would however be increased to US$205,000. Wu declined this suggestion. However, Qian by return email insisted on the change. The negotiation concluded on 23 February, but no supplementary contract was signed to give effect to the amendment. 31.On 25 February, the Chairman of the defendant one Mr Jiang met Chen of the Merchant Bank. They came to a common understanding regarding the scheme of guarantee. Jiang invited Chen to visit the defendant’s base of operation at Yixing of Jiangsu Province. Chen replied that he would organise an investigation team to visit the defendant but only after the defendant had submitted to the Bank its detailed confirmation of assets. Jiang promised to procure the asset information as soon as possible. 32.However, no information was sent to the bank within the two weeks thereafter and no visit by the representatives of the Bank was arranged. Wu then asked Qian repeatedly to satisfy Chen’s request for information. He also asked Qian to pay the plaintiff the US$20,000 deposit. 33.On 21 March, Cheng on behalf of the defendant provided to Chen by email some asset information of the defendant. But that did not answer Chen’s requirements. The matter just dragged on. 34.On 20 April, Chen told Wu of market information that the defendant had already raised some capital from GE by allotment of new shares. That meant the loan and hence the guarantee were no longer required. Wu then queried Qian on this on the phone, but Qian denied that the loan arrangement had ended. She instead urged Wu to continue working. However, Cheng confirmed to Wu in the following month that the loan and guarantee project had ended. 35.On 22 May, the defendant issued a letter of demand to the defendant for US$200,000. The parties met on 31 May for negotiation. Qian at the meeting asked Wu to provide a detailed account of the work done by the plaintiff. Wu declined on the grounds that such an account would require the disclosure of the plaintiff’s trade secret and that the consultancy contract did not require such account. He further said that the disclosure of information also required the consent from the plaintiff’s business partners. 36.Qian also asked the plaintiff to stop working on the project and Wu took this as defendant’s breach of contract. Since the defendant did not pay the plaintiff anything, the plaintiff then started this action against the defendant for damages. 37.Wu also filed a supplemental witness statement to explain the legal aspect of the loan and guarantee arrangement. Since the defendant was a company listed in Hong Kong and was not regarded by the Mainland as a domestic company, the law of the Mainland did not allow a Mainland financial institution to guarantee the repayment of the defendant’s lending from outside sources. In order to find out the permissible way to secure the guarantee, Wu conducted many discussions with the academics, experts and officials of leading universities, financial institutions and some major banks. Eventually, he concluded that the scheme could go ahead by using the defendant’s wholly owned subsidiaries as the guarantors of the defendant’s lending. The Mainland bank would in turn guarantee the subsidiaries. The reason being that the subsidiaries were all companies incorporated and operating in the Mainland and not subject to the legal prohibition above-mentioned. Cheng, who was a graduate of law from the Chinese University of Politics and Law, also found this arrangement acceptable. This apparently simple solution was also provided in a short expert report on Chinese law adduced by the plaintiff. 38.In his list of costs and expenditure, Wu listed all the meetings and research work referred to above. The list is for charging all the work done by the plaintiff’s staff as well as the disbursements incurred. The plaintiff charged $3,500 per hour for Wu’s work and $1,000 per hour for the work of each of his consultants. The plaintiff charged not just the time for conferences and research, but also the travelling time. However, it did not charge the time spent by Wu and his consultants when they were outside Hong Kong but not working. 39.The list shows that the total amount that could be charged for work done from August to November 2005 was at $192,300 which included a sum of $17,300 for disbursements. For December 2005 to 5 April 2006, the total charge was $670,000 including disbursements of $43,000. Since Wu initially did the work on a friendly basis and he only told Cheng on 3 December that he had to charge for the work done, the plaintiff did not claim the charges incurred before December 2005. The claims 40.The Plaintiff claims the deposit of US$20,000 and the balance of the fees under the contract at US$180,000. In the alternative to the US$180,000, the plaintiff claims a percentage thereof to reflect the loss of the chance to earn this sum plus the said wasted expenditure at HK$670,000. 41.The US$20,000 deposit is a contractual payment. Though there was some discussion for it to be reduced, no formal supplemental contract was made to vary it. The defendant also does not dispute that it is payable. I therefore take the view that the defendant is obliged to pay this. The law on loss of a chance for profit 42.Regarding the balance of US$180,000, the contract has not been performed and this sum is not payable. The plaintiff therefore claims in the alternative for damages for loss of the chance of earning this sum. The nature of such claim has been discussed in para. 26-042 of Chitty on Contracts, 13th edition:
43.The plaintiff’s chance of earning the US$180,000 in this case depended on whether the Merchant Bank would have accepted the deal and issued the letter of guarantee to GE. This type of situation has also been discussed in para. 26-044 of Chitty on Contracts:
44.The parties are in agreement on the law. My task is to assess whether there was a real or substantial chance of the Merchant Bank issuing the letter of guarantee. Analysis and decision on the claim for loss of the chance 45.The consultancy contract referred to the requirement of the proposed lender for a letter of guarantee to be issued by an acceptable financial institution to guarantee the repayment by the defendant of the proposed loan of US$20 million. The plaintiff’s task was to look for such an institution. The contract also required the plaintiff to liaise, discuss and negotiate with the institution so as to procure the issue of the letter on the most favourable terms to the defendant. The plaintiff also had to liaise with the defendant, the proposed lender and the financial institution with a view to accomplish the task in a short period. The deadline for the plaintiff was 30 April 2006. 46.The first step towards this goal was achieved when Wu met the representative of the Merchant Bank on 9 February. It seems that before this meeting, the Bank had already agreed to canvass the possibility of issuing the letter of guarantee, but the details had to be work out directly with the defendant. Chen of the Shenzhen Branch of the Bank was assigned with this task. 47.Wu also arranged a dinner meeting for Qian and Chen on 16 February in which he and Cheng also attended. Qian in the meeting gave Chen a brief introduction of the assets and operation of the defendant. She invited Chen to visit the defendant’s operation in Yixing. Chen expressed the view that the scheme of guarantee was basically workable. The plaintiff and the defendant then entered into the consultancy contract on the next day. 48.The next development was a lunch meeting between Jiang of the defendant and Chen on 25 February in which Wu, Cheng and the financial controller of the defendant also attended. Jiang and Chen came to a basic common understanding on the letter of guarantee. Jiang also invited Chen to visit the defendant’s operation at Yixing, but Chen said that he needed a detailed list of assets for use by the defendant to secure the letter of guarantee before he could organise a special investigation team to verify the assets at Yixing. Jiang promised to let Chen have the asset information as soon as possible. 49.Despite Jiang’s promise, the information was not provided in the two weeks thereafter. After repeated reminders, Cheng on behalf of the defendant provided Chen with a list of a small amount of the defendant’s assets. But that was not enough to satisfy the bank’s need. The defendant provided no further information. There was no evidence of further consideration by the bank on whether to issue the letter of guarantee. 50.Counsel for the plaintiff referred to clause 3.4 of the contract between the plaintiff and the defendant which required the defendant to provide all the plants, equipment, shares and other assets as may be required by the proposed guarantor. My construction of this clause is that the defendant was obliged to provide to the proposed guarantor all its assets whether held directly or through subsidiaries, but it would not require the defendant to acquire what it did not have so as to answer the need of the proposed guarantor. I would however assume that the defendant had adequate assets in terms of monetary value to secure the issue of the letter of guarantee, otherwise, I doubt if GE would have agreed to advance the loan in the first place. 51.Nevertheless, the willingness of the Merchant Bank to issue the letter of guarantee would have depended on many factors. The monetary value of the defendant’s assets was just one of them. The issue of the letter of guarantee meant the creation of a potential liability of US$20 million for the Bank. The Bank would have to consider the defendant’s operation, its business outlook, its potential turnover and profitability, its risk of loss and the potential for the Bank to be called upon to pay under the guarantee. 52.According to Mr Chen, the Bank would require from the defendant the details of assets before he would organise an investigation team to visit the defendant’s operation base for verification of the assets. The team would no doubt study the operation of the defendant and report to the relevant committee of the Bank of its findings. It would then be up to the committee to determine whether to accept the deal and to issue the letter of guarantee. Even if the Bank would like to go ahead, there would still be the question of the amount of fees payable by the defendant to the bank. That would have to be negotiated and agreed. 53.On the evidence, the dealing between the defendant and the Bank had barely started. There was not even a full list of assets given to the Bank. The Bank had only signified a willingness to consider the deal. There were still many steps before reaching the goal. The consultancy contract required the plaintiff to accomplish the task on or before 30 April 2006. The task could fail at any point. 54.If it was a simple and attractive deal, the defendant, being a listed company in Hong Kong, could have found a Mainland institution to take it up. Cheng was also working in the finance field. She also could not find any institution to take up the deal. They therefore went to the plaintiff for help. Out of six banks that had been approached by the plaintiff, the Merchant Bank was the only one that was willing to consider taking up the deal. The deal did not appear to be a simple and easy one. There is also no evidence on how positive was the bank’s attitude towards this deal. 55.Furthermore, there was the risk that even with everything lined up by the plaintiff, the People’s Bank of China and the relevant Government department(s) might not approve it, as it was a scheme that sidestepped the prohibition of guaranteeing the defendant direct. The initial contacts by Wu with the officials in December 2005 seemed to suggest that the officials would accept the scheme as workable and acceptable, but that was the early stage when no concrete terms had yet been drawn up and no potential guarantor found. 56.I would also note the oral evidence of Wu that the Merchant Bank and the defendant had already achieved a common intent, the deal had been agreed and the letter of guarantee would be issued upon an application by the defendant. However, in the light of the available objective evidence and in particular the requirements of the Bank, his view was surely over optimistic. 57.Having considered all the evidence, I come to the conclusion that the plaintiff has not established a real and substantial chance that the Merchant Bank would, with the permission of the People’s Bank of China and the relevant Government department(s), issue the letter of guarantee. I therefore find that the plaintiff is not entitled to any damages for the loss of the chance to profit from the consultancy contract. The law on wasted expenditure 58.Regarding the claim for wasted expenditure, which is also known as reliance loss, it has been explained by Lord Denning in Anglia Television Ltd v Reed [1972] 1 QB 60 at 63H-64A:
It has also been discussed in The Law of Contract by Treitl, 12th edition, para. 20-031:
Analysis and decision on the claim for wasted expenditure 59.Wu gave evidence on the work done from August 2005 to April 2006. The work done was in the form of attendance by him and his consultants of many meetings with various Mainland universities, institutions and banks and the research and discussions. 60.Since he had agreed with Cheng initially that he would work on the matter on a friendly basis, the plaintiff therefore did not claim any loss for the work covered by this arrangement. He said he told Cheng at the beginning of December 2005 that he could no longer continue working on this basis. The claim for loss therefore commenced from December 2005 and ended in April 2006. The total sum claimed under this head is HK$670,000 including disbursement of HK$43,000. 61.Counsel for the defendant attacked Wu’s evidence on this loss vigorously. Counsel pointed out the lack of verification of work done by any contemporaneous document. There were not even documents like receipts and invoices for travelling and accommodation. There was also no contemporaneous record of the meetings, conferences and the amount of time spent or any contemporaneous report of work done by email from Wu to Cheng. 62.Counsel also criticised Wu for failing to recall the exact name of the institution which conferred an MBA degree on him. But counsel did not question Wu’s claim of having an MBA. This attack was thus not on credibility, but perhaps on how good was Wu’s memory. 63.Counsel also referred to certain oral evidence as being important but criticised Wu for failing to mention it earlier in his witness statement. This included the alleged consent by Cheng for Wu to meet with academics and government officials in September 2005 and that Cheng had told him that he could charge for work done since August 2005. Counsel also referred to Wu’s emails to Qian where Wu only referred to work done since December 2005 but not before. Counsel also charged Wu as being dishonest when Wu alleged that because of computer virus, he had lost the record of a list of work done that he had sent Qian on 6 June 2006. Wu later refused to compile the list again for the benefit of Qian. 64.Counsel also said it was unreasonable for Wu to have incurred $192,300 just on a friendly basis. Wu at that time was not very well acquainted with Cheng and had no contact with the defendant yet. However, this sum was mainly made up of the hourly charges for work done. The actual out of pocket expenditure was only $17,300. 65.On the whole, I agree that there are some aspects of Wu’s evidence that may not appear entirely satisfactory. This is particularly so for the work done before December 2005. There is also the lack of particulars as pointed out in the summary of evidence above. However, Wu had repeatedly said in his witness statement that he had from time to time made verbal reports to Cheng in meetings and by phone. He also said that Cheng had attended the meetings with Everbright Bank and the Merchant Bank. He also referred to Qian’s confirmation to him that Cheng had authority to represent the defendant. But the defendant had not called any evidence to rebut Wu’s evidence. 66.I think Wu’s task was not as simple as hindsight may conclude. Prima facie, no institution was permitted by the law to provide a guarantee to GE in support of the defendant. Neither the defendant nor Cheng could have solved the problem. To make use of the defendant’s subsidiaries to side step the prohibition was not without risk. Not many banks were interested in taking up the deal. 67.There might have been experts who thought the scheme workable, but ultimately it needed approvals from the People’s Bank of China and the relevant Government department(s). He was able to obtain some confirmations from the officials in December 2005. But that might not have been reliable as there was nothing concrete at that time. 68.The defendant was looking for a US$20 million loan. If after everything had been lined up but the scheme was not approved by the People’s Bank or the relevant Government department, the defendant would suffer immensely. The result would have been disastrous. Hence, the many visits by Wu to the academics, experts and officials now appear to me to be justified for the sake of prudence. 69.All in all I find Wu an honest witness. I accept that Wu and his consultants had indeed done the work as Wu said in his evidence. 70.However, the sum of $670,000, less the disbursement of $43,000, was made up of hourly charges that the plaintiff would have charged the defendant for work done. It was not actually expenditure incurred by the defendant. It is a quantum meruit claim which is not permissible here. The plaintiff cannot make a quantum meruit claim in the name of wasted expenditure (see Bowstead & Reynolds on Agency, 18th edition, para. 7-024). The plaintiff’s expenditure should be the disbursements at $43,000, the disbursements incurred before December 2005 at $17,300 and the salaries paid to Wu and the consultants for the periods when they provided service for the defendant. 71.If the plaintiff should be paying Wu $3,500 per hour, it would work out to a salary of $490,000 per month on the basis of 20 working days per month and seven working hours per day. In the absence of any evidence of Wu’s salary, I am not prepared to accept $3,500 per hour as the plaintiff’s expenditure for him. 72.For the same reason, I am not prepared to accept $1,000 per hour as the plaintiff’s expenditure for each of the consultants. On the same basis, such expenditure would work out to a salary of $140,000 per month. 73.Doing the best I can, I would award 1/3 of $627,000 as the plaintiff’s human resources expenditure since December 2005. I would also award the plaintiffthe full amount of the disbursements at $43,000 and $17,300. The total is at $267,800. I also order the defendant to pay the plaintiff the deposit of US$20,000. I do not think there is double recovery as the expenditure of $269,300 was incurred to earn the balance of fees at US$180,000. The defendant’s breach only deprived the plaintiff of that sum. I also make a costs order nisi that the defendant do pay the plaintiff costs of this action to be taxed on the District Court Scale.
Ms Jane T C Ho, instructed by Messrs Anthony Ho & Co., for the Plaintiff Mr Law Man Chung, instructed by Messrs Chiu & Partners, for the Defendant Appeal by the Plaintiff to Court of Appeal dismissed. Please refer to CACV134/2009 dated 19 July 2010 |
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