Shenzhen Zhaotian Investments Co Ltd v. Henderson Land Development Co Ltd and Another

CACV 79/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 79 OF 2012

(ON APPEAL FROM HCA NO. 825 OF 2008)

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J U D G M E N T

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Hon Cheung JA:

1.I agree with the judgment of Yuen JA.

Hon Yuen JA:

2.In this appeal, there is an appeal and a cross-appeal from a judgment of Yam J given on 15 March 2012 after a 9-day trial. 

3.The litigation comprised two actions (HCA825/2008 and HCA899/2009) involving three camps:

(1) Shenzhen Zhaotian Investments Co Ltd (“Zhaotian”);

(2) Beijing Henderson Properties Co Ltd (“BH”) and its ultimate parent company Henderson Land Development Co Ltd (“Henderson Land”), collectively referred to as “the Henderson Companies”; and

(3) Strait Peaceful Reunification Foundation Ltd (“Foundation”) and its business arm Tian Li (Hong Kong) Trading Ltd (“TL”), collectively referred to as “Foundation/TL”. 

Zhaotian and Foundation/TL were allies in the litigation.

Background

4.1.Save where stated to the contrary, the following summary of the background is taken from undisputed facts and contemporaneous documents.

4.2.From the late 1990's onwards, BH was involved in real estate development in the PRC.  Units in an apartment project in Beijing were sold in Hong Kong.  Although the proceeds of sale were apparently reflected in BH’s accounts, the funds were not remitted back to the PRC.

4.3.Mr Sun Jian and Miss Lisa Sun (collectively “the Suns”) had purchased a total of three units with loans from China Property Finance Ltd (“China Property”), another company in the Henderson group.  The Suns claimed to be dissatisfied with the units and failed to repay sums due to China Property.  This led to litigation in the PRC in which the Suns were unsuccessful.  China Property applied for execution of the court’s orders.

4.4.In the meantime the Suns informed the Beijing Foreign Exchange Administration Department of the State Administration of Foreign Exchange (“SAFE”) about BH’s retention of the proceeds offshore.

The first SAFE investigation (“the 1^st investigation”)

5.1.In 2004-5, SAFE launched an investigation into BH’s retention offshore of proceeds of sale in a total sum of HK$1,024m. This was said to be in violation of PRC regulations for foreign exchange control, which required PRC companies to remit back to the PRC any funds received offshore.  The regulations provided that an administrative penalty of between 30% and 500% of the funds could be levied.

5.2.On 31 January 2005 BH appointed Mr Zhang Jinlin (“Mr Zhang”)to liaise with SAFE officials in the investigation. Mr Zhang was described for this purpose as “personal assistant” to the Managing Director of BH, Mr Lee Ka Kit (“Mr Lee Jr”). 

5.3.Mr Zhang was a director of TL and the secretary of Foundation, of which Mr David Lam (“Mr Lam”) was chairman.

5.4.Subsequently from February 2005 to July 2006, BH engaged Foundation as a PRC business consultant, for which Foundation was paid a monthly consultancy fee.

6.1.During this time, BH remitted funds of about USD131m (about HK$1,024m) back to the PRC. 

6.2.On 6 September 2005 SAFE sent a Notice of Administrative Penalty stating that it intended to impose an administrative penalty of RMB6.324m, representing 0.6% of the offshore funds.  It stated that this was because the offshore funds had been remitted back to the PRC.  The penalty was duly paid by BH on 8 October 2005. 

TL’s agreement to buy units from the Suns

7.1.In the meantime BH was persuaded by a mainland liaison office in Hong Kong to consider settling with the Suns who apparently had friends in high places.  The Suns’ proposal was that they would return the units to BH in exchange for the sums they had paid.

7.2.  As the Suns had complained about the floor area of the units, it was thought that it would be better for a third party to be seen to purchase the units from them, rather than for BH to re-purchase the units itself.

8.1.Accordingly, by two written agreements dated 2 October 2005, TL agreed to buy the units from the Suns.  These were fairly complicated agreements because of the interest element in the loans from China Property, but the details are not material to this appeal.

8.2.Under these agreements, TL would pay directly to Sun Jian and Lisa Sun the sums of USD186,229.50 and USD539,196.37 respectively within one month after the agreements took effect. The agreements were to take effect upon written consent from BH and China Property and the withdrawal of the applications for execution in the litigation against the Suns.  In due course, on 23 December 2005 the PRC court approved the withdrawal of the applications for execution against the Suns.

8.3.As part of the settlement arrangement between the Suns and BH, on 8 December 2005 two written agreements were made between BH and China Property of the one part (referred to as Party A) and Foundation/TL of the other part (referred to as Party B).  These are referred to as the “property settlement agreements”.  One agreement was a simplified version of the other in that it did not refer to the loans from China Property.

8.4.In the full agreement,

-  it was recited that Party B had agreed to purchase the Suns’ units by paying the Suns directly a total sum of USD841,765.11 and by taking over liability for the outstanding sums due to China Property in a total sum of USD1,289,107.52.  Transfer tax in the sum of USD45,000 would be incurred; 

-  it was agreed that the three amounts set out above, ie a total sum of USD2,175,872.63, would be lent by Party A to Party B interest-free, and that 

-  immediately upon receipt, Party B would repay the outstanding sums due to China Property; and

-  Party B would not be required to repay the loan to Party A, and in set-off, Party B should transfer the units to Party A free of payment when called upon to do so.

8.5.Pausing here, as far as the sums payable to the Suns themselves were concerned, it would appear that the figures set out in the agreements between TL and the Suns (totaling USD725,425.87) were different from the figures set out in the agreements between TL and BH (totaling USD841,765.11) but this difference is not material to this appeal. 

8.6.Sums totaling HK$16,892,275.99 (equivalent to the total sum above of USD2,175,872.63) were transferred by BH to Foundation between 6 January and 24 January 2006.  These sums are referred to hereafter as “the property settlement funds”. 

8.7.However, Foundation/TL apparently did not make any payment to China Property.  Further, in March 2006 the Suns complained to BH that they had not received from TL the full amount of the funds to which they were entitled.  The trial judge found (and there is no appeal from this finding) that TL paid the Suns only HK$525,000 together with tax of HK$349,335. 

8.8.As a matter of completeness, it is not disputed that BH eventually re-purchased the units from the Suns directly sometime between the end of 2007 and the beginning of 2008.

The second SAFE investigation (“the 2^nd investigation”)

9.1.In the meantime, on 27 February 2006 another investigation was launched by SAFE into BH’s foreign exchange transactions.  The subject-matter of the investigation is summarized in para. 10.2 below. 

9.2.As BH’s consultant, Foundation/TL again liaised with SAFE.  BH paid Foundation/TL HK$3m in June - July 2006 for its services, but the matter remained unresolved by August 2006. 

10.1.By this time, Mr Alexander Au Siu Kee, an experienced banker who had been appointed an Executive Director and Chief Financial Officer of Henderson Land in December 2005, had started to oversee matters relating to the 2^nd investigation.  He reported to Mr Colin Lam, Vice-Chairman of Henderson Land and occasionally to Mr Lee Jr.  He was assisted by Miss Candy Chan Lin Kam, Deputy Accounts Manager of Henderson Land. 

10.2.On 30 August 2006, Miss Chan had a meeting with SAFE officials together with Mr Zhang of Foundation/TL.  The particulars of SAFE’s allegations in the 2^nd investigation were clarified and recorded in Miss Chan’s report to Mr Au, as follows: 

(1)  SAFE alleged that of the funds remitted back to the PRC in the 1^st investigation, a sum of HK$414m was actually investment of foreign funds, and not remitting proceeds of sale.  The SAFE official said this “variation in the character of the funds” was in breach of regulations, as “hedging was not permitted”, and BH’s “dual use of one fund” was in breach of the foreign exchange regulations;

“而在2006年第二次調查中，發現北京恒兆在第一次調查向其報列在港收取北京恒兆並已匯返北京之樓價款中，約有港幣4.14億元並非樓價款，實則是外匯投資款。姜處長指資金性質發生變化是不可能，國家更絶不容許對冲。北京恒兆‘一款兩用’嚴重違反國家外管法規。”

(2)  in 1998-9, BH had lent a sum of HK$20m in Beijing to a company called  環球夢幻 (“Global Fantasy”), but Global Fantasy’s part repayment of HK$15.7m in Hong Kong had not been remitted back to the PRC;

(3)  in March 1998, BH had transferred USD17.5m (HK$135.4m) to an account in Hong Kong belonging to another company in the Henderson group without SAFE’s approval.

These three sums came up to a total sum of about HK$565m. 

Zhaotian’s involvement

11.On 7 September 2006 Mr Lam (the chairman of Foundation) met with Mr Au.  This was the first time they had met.  Amongst other things discussed, Foundation /TL suggested that Mr Tian Cheng Gang (“Mr Tian Jr”) should be approached to assist in the 2^nd investigation.  Mr Tian Jr’s father is Mr Tian Ji Yun (“Mr Tian Sr”), a former Vice-Premier.  Mr Au accepted Mr Lam’s suggestion.  Mr Au said he asked about fees but Mr Lam indicated that as Foundation was already paid a monthly consultancy fee, no further fee was needed.  (Pausing here, it would be noted that this was stated in Mr Au’s first witness statement dated 21 December 2009, and Mr Lam’s witness statement dated 9 August 2011 did not challenge this, nor did Mr Lam give evidence at trial). 

12.This meeting was followed by another meeting on 15 September 2006 between Mr Lam and Mr Au along the same lines.

13.Subsequently Mr Tian Jr through his company Zhaotian entered the picture. 

14.1.At Mr Tian Jr’s suggestion, Mr Lee Shau Kee (“Mr Lee Sr”), writing as chairman of the “Hong Kong Henderson Development Group”, sent a letter dated 5 October 2006 to Mr Tian Sr stating Mr Lee Sr’s belief that BH’s problem would be speedily and reasonably resolved, given Mr Tian Sr’s concern and the importance he attached to the matter. 

14.2This was followed by a letter from Zhaotian dated 12 October 2006 to Mr Lee Sr signed by Mr Tian Jr, saying the following:

-  Mr Tian Sr has sent written instructions to SAFE in connection with the investigation.

-  SAFE had two opinions regarding the penalty:

(1) SAFE had dealt leniently with BH the previous year, but now BH has been found to have evaded exchange regulations again.

(2) SAFE had decided to impose a “heavy penalty” of 30% of the funds in question, in the total sum of HK$170m.

-  Through “co-ordination” of many sides, SAFE has agreed as a matter of principle that BH could “vary the character” of HK$580m that BH had placed offshore, so as to avoid the penalty of 30%.  (It would be noted that the figure in Miss Chan’s report of her meeting with SAFE officials was HK$565m, which was different from the figure referred to in this letter of HK$580m.  There appears to be no explanation of the difference but this is not material to the appeal).

-  Foundation has drafted an application report for “variation of the character” of the funds, on which BH should affix its seal promptly.

14.3.This was followed on 25 October 2006 by a Supervisory Opinion issued by SAFE to BH.  This referred to two figures of USD46.947m and USD2.029m  (supposedly the two sums referred to in paras. 10.2 (1) and (2) above) in the total sum of USD48.9762m (about HK$381m) which had been kept offshore.  (Any discrepancy in the figures is not material to this appeal).  The Supervisory Opinion went on to state that this was evasion of exchange regulations, for which a penalty of 30% to 500% should be imposed.  BH was asked to consider the consequences and to implement effective measures for “rectification”.

15.I now come to the crucial part of the case.  On 1 November 2006 Mr Tian Jr and Mr Au met for lunch in a private room of a hotel restaurant in Hong Kong.  Mr Lam was there initially but left soon after introductions were made.  Apart from Mr Tian Jr and Mr Au, also present were Mr Zhang, Miss Chan and another member of staff from the Henderson group. 

16.1.The crucial issue in this case was whether Zhaotian’s remuneration was agreed at that meeting.

16.2.The case of Zhaotian and Foundation/TL was that at this meeting, Mr Au on behalf of BH and Henderson Land agreed to pay Zhaotian a lump sum of HK$43m as its consultation fee for the 2^nd investigation. This is denied by the Henderson companies.  This issue will be discussed in detail later in this judgment. 

Conclusion of 2^nd investigation

17.The following day, on 2 November 2006 BH wrote a letter to SAFE offering to set off the offshore funds against the company’s foreign debts. 

18.1.On 22 November 2006, SAFE sent BH a Notice of Administrative Penalty.  It referred to the sum of USD2,029,163.04 that Global Fantasy had repaid directly to an associated overseas company of BH, and to the sum of USD46,947,000 being the total proceeds of sale which had not been transferred back to the PRC.  The two sums totaling USD48,976,163.04 (equivalent to RMB389,751,416.84) were in breach of foreign exchange regulations.  It referred to the rate of penalty of 30% to 500%, but then stated that as BH had “taken the initiative to eliminate the dire consequences of offending the law”, it intended to impose a penalty of only RMB2.33m.  BH had 7 days to make submissions. 

18.2.The penalty of RMB2.33m is equivalent to 0.6% of RMB389,751,416.84.  This was the first time that SAFE had mentioned the adoption of this rate to the funds in the 2^nd investigation.

19.On 27 November 2006 Mr Tian Jr met with Mr Au, and a letter of the same date was sent by BH to SAFE thanking it for its leniency.

20.Subsequently SAFE sent a Decision of Administrative Penalty on 4 December 2006 along the same lines as its Notice, and payment forms for the penalty of RMB2.33m dated 7 December 2006 were provided to BH.  The penalty was paid on 15 December 2006.

Zhaotian’s request for payment

21.In a letter dated 11 December 2006 from Zhaotian addressed to Mr Au, Mr Tian Jr sent his regrets declining Mr Au’s invitation to a meal, the latter having conveyed his invitation through Mr Lam, and reported the following:

-  1^st, SAFE had intended to impose a penalty of 30% (ie RMB160m) for BH’s evasion of foreign exchange regulations in the sum of RMB500m, but through the efforts of many parties, the final penalty was RMB2.33m which BH should pay promptly (emphasis added);

-  2^nd, BH should clear up remaining foreign debt problems resulting from confusing arrangements made in the past, to avoid incurring a heavy penalty again;

-  3^rd, Zhaotian “intends” to receive from “the Henderson group” PRC business consultancy fees, and the amount in the invoice issued by Zhaotian “will prevail”.  I note that the language used is inconsistent with an existing agreement.

“深圳市兆田投資有限公司擬向恒基集團收取大陸業務顧問費用，金額將以深圳市兆田投資有限公司所開發票為準。”

22.Zhaotian did not issue a document headed “invoice”, but provided a document headed “receipt” also dated 11 December 2006, which on its face acknowledged receipt from BH of HK$43m in payment of “Consultation Fee”.  Mr Tian Jr testified that this was the invoice mentioned in the letter of the same date, and that the terms “invoice” and “receipt” were interchangeable in the PRC.  None of the parties suggested that this was a receipt for HK$43m, and it should be noted that Zhaotian and Foundation/TL never suggested that it was a receipt for part of HK$43m. 

23.This is notable because starting from a few days before this “invoice”, between 4 December 2006 and 15 March 2007, Foundation /TL transferred a total of HK$12.996m to Zhaotian in various tranches.  Zhaotian alleged that this was “on account of the consultancy fee payment by [Henderson Land and BH] to [Zhaotian]” (para 33, Amended Statement of Claim).  This will be discussed later. 

Litigation

24.1.Zhaotian subsequently claimed HK$43m, alternatively the balance (ie HK$43m less HK$12.996m) from the Henderson Companies in HCA825/2008. There was no claim for quantum meruit.   

24.2.In defence, the Henderson Companies denied that they had agreed to pay a lump sum of HK$43m.  They also denied they had authorized Foundation/TL to pay any sums to Zhaotian.  In their counterclaim, they pleaded that “if, which is not admitted, [Zhaotian] has received from [Foundation or TL] the sum of $12,996,000 or any other sum, [Zhaotian] is liable to refund the same to [Henderson Land and BH]”.  However it would be noted that no specific cause of action was pleaded in support of the counterclaim. 

24.3BH also sought return of “the property settlement funds” from Foundation and TL in HCA899/2009.   

Issues

25.1.The issue between Zhaotian and the Henderson Companies (the subject-matter of HCA825/2008) is straightforward.

25.2.As mentioned above, Zhaotian claims that at the lunch meeting on 1 November 2006, an oral agreement had been reached between Mr Tian Jr (for Zhaotian) and Mr Au (for the Henderson Companies) that the Henderson Companies would pay Zhaotian $43m as its consultation fee.

25.3.The Henderson Companies’ defence is simply that no sum had been agreed whether on 1 November 2006 or at all.  The Henderson Companies accept that they expected Zhaotian would wish to charge BH for its services notwithstanding Mr Lam’s statements, and they were aware of this possibility at the time.

25.4.However as the judge noted in his judgment (at paras. 9 and 36), Zhaotian’s case was based, and based only, on the alleged oral agreement.  There was no alternative claim for quantum meruit. 

25.5.Therefore, as far as the case between Zhaotian and the Henderson Companies was concerned, the question was whether Zhaotian could prove on a balance of probabilities that Mr Au had on behalf of the Henderson Companies agreed to pay $43m to Zhaotian as the consultancy fee in the 2^nd investigation.

25.6.There was also the Henderson Companies’ counterclaim for “refund” of the $12.996m. 

26.1.The issue between BH of the one part and Foundation/TL of the other part (the subject-matter of HCA899/2009) was as follows.

26.2.As stated above, Foundation/TL had received “the property settlement  funds” in January 2006.  It is not disputed that Foundation/TL did not pay China Property and paid only a portion of the funds to the Suns. 

26.3.However Foundation/TL claim that BH had, through Mr Ho Wing Fun (“Mr Ho”), authorized them to use “the property settlement funds” to make advance payments to Zhaotian on account of the consultancy fee (para. 16 Defence of Foundation/TL in HCA899).

27.1.Mr Ho was until 1 July 2006 employed in the following positions: executive director, assistant general manager, and general manager of the accounts department of Henderson Land; executive director of Henderson Investment Ltd; and executive director and deputy general manager of Henderson (China) Investment Co Ltd.  However he had no position with BH. 

27.2.On 1 July 2006 Mr Ho, then aged 74, retired from these positions.  Thereafter his only position in the Henderson group of companies was as a consultant for Henderson Land and as legal representative of Guangdong Jiaxin Real Estate Co Ltd, a project in which a Henderson company was involved.  His position as consultant was terminated in August 2008. 

28.1.According to Foundation/TL, the authorization allegedly given by Mr Ho was in a letter dated 30 November 2006 purportedly from Henderson China Holdings Ltd (“Holdings”) Finance Department which he signed.  It was handwritten by Mr Ho on a piece of unheaded notepaper (“the alleged authorization”). 

28.2.As mentioned above, as at the date of this “alleged authorization”, Mr Ho was no longer a director of Henderson Land, and he had never held a position with BH, which were the two defendant companies.  There was no evidence as to any involvement of Holdings.  The defendant companies denied that Mr Ho had any authority to give “the alleged authorization” to Foundation and TL. 

Trial

29.The two actions were ordered to be heard together. 

30.1.At the trial, Mr Zhang and Mr Tian gave evidence.  Mr Ho, who had signed a Statutory Declaration drafted by solicitors for Zhaotian and Foundation/TL, was subpoenaed by them to testify.

30.2.For the Henderson Companies, Mr Au gave evidence, as did Miss Chan.

Judgment

31.1.Both teams of lawyers submitted detailed opening submissions.  After oral evidence finished, the judge gave directions for both sides to provide written closing submissions concurrently. 

31.2.This was done on 18 November 2011.  The submissions of counsel for Zhaotian and Foundation/TL came up to 66 pages.  Those of counsel for the Henderson Companies came up to 40 pages. 

31.3.Again pursuant to directions, both sides provided written submissions in reply concurrently a week later.  These were less lengthy than the closing submissions but were no less thorough.

32.1.On 15 March 2012, the judge handed down a 36-page judgment.  He dismissed Zhaotian’s action against the Henderson Companies (HCA825/2008).

32.2.The judge dismissed the counterclaim, saying at para.66 that “[BH] is not pressing for its counterclaim against Zhaotian in HCA825 of 2008”.

32.3.As for the other action (HCA899/2009) the judge gave judgment in favour of BH against Foundation/TL and ordered them to repay the sum of HK$16,017,941, being the original “property settlement funds” of HK$16,892,275.99 less sums accepted as having been paid to the Suns and tax.  The sum ordered to be repaid (HK$16,017,941) included the sums totaling HK$12,996,000 which Foundation/TL had paid to Zhaotian. 

Grounds of Appeal

33.1.Zhaotian appealed the dismissal of its claim in HCA825/2008. BH cross-appealed the dismissal of its counterclaim in that action.  Foundation/TL appealed the judgment ordering them to repay BH in HCA899/2009.   

33.2.I shall deal with Zhaotian’s and Foundation/TL’s appeals first.  Their counsel Mr Kenneth CL Chan (who did not appear below) accepted that this case turns on findings of fact.  He also recognized that it is well-established that generally an appellate court would not disturb a trial judge’s findings of fact, as the trial judge had the advantage of seeing and hearing first-hand the witnesses giving their testimony in the witness box (Ting Kwok Keung v Tam Dick Yuen (2002) 5 HKCFAR 336). 

34.However Mr Chan submitted that by reason of the large-scale “copy and paste” operation performed by the judge in his judgment, the judge has abdicated his judicial function, or at least his conduct was such that justice has not been seen to be done. 

35.Although Mr Chan seemed at first to suggest that a re-trial was inevitable once he showed that the judge had adopted verbatim the submissions of counsel for the Henderson Companies, his subsequent position was that an appellate court should adopt a “sliding scale” approach – that is, the larger the scale of incorporation, the stronger should be the appellant’s chances of obtaining a re-trial, and the less the appellate court should itself examine the case on its merits.  His final position was that he accepted that it was open to this court to make its own findings on the materials before it. 

Dicta in Nina Kung v Wang Din Shin

36.1.On the issue of a judge’s incorporation of a party’s submissions, this court is guided by the dicta of the Court of Final Appeal in Nina Kung v Wang Din Shin (2005) 8 HKCFAR 387, at paras. 445-456. 

36.2.In summary, it was held that whilst there was nothing wrong with a judge quoting verbatim the submissions of one party (usually after open acknowledgment), serious questions may arise as to whether the judge had applied his own reasoning and logic in his decision if the degree and manner of the copying would raise such doubts in the mind of the other party.

36.3.In that case, legitimate concerns arose as to whether the judge had brought an independent mind to bear on his judicial function, because there was first, an inexplicable reversal of an earlier ruling that the judge had made, and secondly, the view the judge expressed in the judgment regarding the integrity of an expert witness was contrary to an approach he had taken during the hearing, and this reversal was also not explained. 

36.4.However in that case, the point was academic because both parties accepted that the court of appeal was in as good a position as the trial judge to draw the necessary inferences and make conclusions of fact, and it was acknowledged by all parties that the appellate judges had brought independent minds to bear on the issues.  Further, in that case, the appeal succeeded on substantive grounds. 

This case

37.In the present case, Appendix 3 of Mr Chan’s submissions shows that again a substantial proportion of the judgment has been lifted more or less verbatim from the written submissions of counsel for the Henderson Companies.  Mr Chan has suggested more than 90%.  Mr Jat has not challenged this estimate.

Discussion

38.1.Such a large-scale verbatim incorporation of counsel’s submissions by the judge is most regrettable, especially after observations on this aspect had been made by the Court of Final Appeal in Nina Kung. It is noted that in the judge’s judgment in this case, counsel’s submissions were acknowledged, but the Court of Final Appeal’s dicta make it clear that irrespective of acknowledgment, a judge should not simply copy and paste submissions on such a large scale.  When a judge uses his own words to set out his understanding of the parties’ arguments and to explain his conclusions, there is a process of rumination which is manifested in the written judgment.  That process is not apparent where a judge simply copies counsel’s submissions verbatim, with or without acknowledgment. 

38.2.Having said that, I do not think an appellate court would be doing its duty if it permits the degree of incorporation alone to determine its decision whether to allow the appeal and to order a retrial.  For that would not be fair to the respondent, who is not to blame for the judge’s actions.  A re-trial is costly for the parties, and time-consuming for the parties and the court as well, and provides an opportunity for the parties to tailor their evidence or focus their submissions after reviewing the first judgment. 

38.3.In my view, in these situations an appellate court should examine whether the judgment, notwithstanding large-scale incorporation, nevertheless showed that the judge had brought an independent, analytical mind to bear on his decision.  And this court should test the decision by scrutinizing the evidence closely, paying particular attention to undisputed facts, contemporaneous documents and the internal consistencies or inconsistencies of the parties’ respective cases. 

Judge’s independent analysis and judgment

39.I shall first consider whether the judgment showed that the judge had brought an independent, analytical mind to bear on his decision.

40.First, it would be noted that there is in the present case no unexplained reversals of decisions or inconsistent rulings (such as in the Nina Kung case) which pointed to the lack of an independent mind having been brought to bear on the judgment. 

41.1.Further, there are important points made by the judge in his judgment which had not appeared in the submissions of the Henderson Companies’ counsel. 

41.2.There is first, the judge’s observation that Zhaotian’s case is based on the agreement alone, with no claim for quantum meruit (para. 9 of the judgment).  The judge also referred to evidence which he considered corroborated Mr Au’s evidence that he had never agreed to the alleged demand for HK$43m, although the Henderson Companies were willing to consider the question of paying some fees and left the matter open for discussion (para. 36 of the judgment).  The judge obviously applied his mind to this issue, and concluded that in the absence of an agreement, quantum meruit would have been the reasonable result in fact and in law.  However Zhaotian did not claim quantum meruit (even in the face of a counterclaim for refund) and no evidence was adduced in support of it. 

41.3.Further the judge placed particular emphasis on the important differences in the evidence of Mr Tian Jr as to the manner in which Mr Au was alleged to have agreed to the demand for HK$43m. 

41.4.To set the scene on this aspect, the Amended Statement of Claim had pleaded that there was an oral agreement which had been made by Mr Au on behalf of the Henderson Companies at the hotel restaurant on 1 November 2006 (para. 23 ASOC). 

41.5.This was followed by Mr Tian Jr’s witness statement where he referred to the oral agreement as “the aforesaid discussions between myself and Mr Au” (emphasis added, para. 21).  The natural and ordinary meaning of these words is that Mr Tian Jr and Mr Au had talked to each other and exchanged views before arriving at a meeting of minds. 

41.6.However Mr Tian Jr’s evidence in court was that the agreement was made when he only “whispered” to Mr Au the figure of HK$43m and Mr Au simply nodded, without any discussions and without any oral expression of agreement.

42.Thirdly, the judge specifically and independently set out his perception of Mr Au and Miss Chan after seeing and hearing them in the witness box.  He described Mr Au’s evidence as “firm”. Miss Chan gave evidence in a “careful manner”.  More importantly, “both of them would not say anything which is not within their personal knowledge and if it is so, they would state the source of their information.  Their answers were completely consistent with the documentary evidence ...” (para. 32 of the judgment). 

43.Fourthly, the judge referred to one part of Mr Ho’s oral evidence which the  Henderson Companies’ counsel did not refer to, but which obviously made a deep impression on the judge (para.57 (2) of the judgment).

44.In my view, these points indicate that despite the large-scale incorporation of counsel’s submissions, the judge had brought an independent, analytical mind to bear on his decision.

Examination of the evidence

45.Further, having scrutinized the evidence (including the transcripts) in detail, I am satisfied that the judge’s decision was justified by the undisputed facts and contemporaneous documents and by an examination of the consistencies and inconsistencies in the parties’ respective cases.  In my view any reasonable judge would have come to the same conclusions.  In the circumstances there was no or no substantial miscarriage of justice.

46.As mentioned above, the issue between Zhaotian and the Henderson Companies was whether there was an agreement made on 1 November 2006 by Mr Tian Jr (on behalf of Zhaotian) and Mr Au (on behalf of the Henderson Companies) that the Henderson Companies would pay Zhaotian HK$43m as its fee for the 2^nd investigation.

47.Zhaotian had the burden of proof.  It relied on the evidence of Mr Tian Jr and Mr Zhang who both alleged that Mr Au had made an “oral agreement” with Mr Tian Jr at the lunch. The evidence of Mr Au and Miss Chan was that the lunch was a social event as he had never met Mr Tian Jr, and there was no discussion of fees for Zhaotian, let alone an agreement.

48.1.First, Zhaotian and Foundation/TL’s case is unsatisfactory as to how Mr Au made the alleged agreement. 

48.2.I have referred above (para. 41.3 - 41.6) to that part of the judgment where the judge pointed out the discrepancies in the case of Zhaotian and Foundation/TL on the manner in which Mr Au is said to have agreed to Mr Tian Jr’s demand for HK$43m as Zhaotian’s fee. 

48.3.In Zhaotian and Foundation/TL’s pleadings and witness statements (which stood as evidence in chief) they had referred to “discussions” and “oral agreement”.

48.4.Mr Zhang gave evidence first.  He did not say anything to suggest that there was anything other than that he heard oral discussions between Mr Tian Jr and Mr Au followed by an agreement.

48.5.However, when Mr Tian Jr was cross-examined, he said for the first time that he and Mr Au had a “private discussion” concerning his request for HK$43m.  Mr Tian Jr said he was sitting with Mr Au, and he (Mr Tian Jr) spoke so softly to Mr Au that it was inaudible to the other persons present.  According to Mr Tian Jr, Mr Au said nothing and only nodded.  Mr Tian Jr thereupon considered that his request for HK$43m had been approved.  In court Mr Tian Jr accepted that in his instructions to his own lawyers, he had not mentioned the above allegations (Transcript p.172N - 174S).

48.6.Mr Tian Jr’s evidence that he spoke softly to Mr Au, inaudibly to the others, and that Mr Au had said nothing does not sit well with Mr Zhang’s evidence.  Mr Zhang did not give any evidence to the effect that that was what happened, nor did he purport to explain how, despite the above, he nevertheless had been able to discern that an oral agreement had been made.  His evidence is therefore also suspect. 

49.1.Moreover it is not only in respect of this aspect that the allegation of an oral agreement was not proved satisfactorily. I shall first consider Zhaotian’s case that at the lunch, Mr Tian Jr had expressly justified the quantum of the fee. 

49.2.Mr Tian Jr said in his witness statement that at the lunch, he pointed out to Mr Au that he (Mr Tian Jr) had been told that SAFE was inclined to impose a penalty at the rate of 34% (para.20).  He proposed a fee of HK$43m on the basis that it represented 1/3 of such a fine, although Mr Au “never inquired how the proposed fee was arrived at, but simply accepted it on behalf of” the Henderson Companies (para. 20(2)). 

50.1.I shall first consider the evidence regarding the rate of 34%, which Mr Tian Jr said he had told Mr Au about at the lunch and which Mr Au denied. 

-  First, the rate of 34% had not been referred to at all in any documents prior to the litigation. 

-  More importantly, Zhaotian’s own contemporaneous document showed that SAFE had already agreed to apply a rate of 30% or lower, not higher.  In the letter dated 12 October 2006 from Mr Tian Jr to Mr Lee Sr, Mr Tian Jr reported SAFE’s opinion that a “heavy fine” of 30% should be imposed – but that as a result of negotiations, SAFE had “agreed in principle to allow [BH] to alter the nature of the HK$500 million odd which it had failed to remit back, thereby avoiding the 30% penalty” (Mr Tian Jr’s supplemental witness statement, para. 8) (Emphasis added). 

-  The Supervisory Opinion dated 25 October 2006 simply referred to the range set out in the regulations and contained no suggestion that there would be an increase in the rate of 30% which Mr Tian Jr said had been avoided.

-  Mr Tian Jr tried to explain this in his witness statement.  He said that it was only after the Supervisory Opinion was obtained, i.e. sometime between 25 October and the end of October 2006, that he “came to know” through telephone conversations with various officials that SAFE was inclined to impose a penalty of 34%, but would be willing to consider a reduction from 34% if good reasons and mitigating factors could be provided (Mr Tian Jr’s supplemental witness statement para. 11, and affirmation filed 2 March 2010 para. 3(9)).  However there was no evidence explaining why SAFE had proposed to increase the rate of penalty from 30% to 34% after Mr Tian Sr had already sent it written instructions in favour of the Henderson Companies, as Mr Tian Jr had reported to Mr Lee Sr only two weeks earlier (see para 14.2 above).

-  If there had been such a proposed increase, one would have expected it to cause consternation to Zhaotian.  As BH’s consultant, its task was to  procure as low a penalty as possible, and Mr Tian Jr had already reported to Mr Lee Sr that a 30% penalty would be (or at least was likely to be) “avoided”.  A proposed imposition by SAFE of an increase to 34% would have come as a shock, an unexpected and unwelcome reversal in SAFE’s softening attitude and one which would have caused Zhaotian extreme concern.  Even though Zhaotian said it was “not informed as to how the 34% figure was arrived at” (see para.2(3) Further and Better Particulars of ASOC), Zhaotian apparently took no action to find out and address the reasons for the proposed increase.

-  Further, since Zhaotian had already informed BH that it was likely to avoid a 30% penalty, this unexpected increase in the rate of penalty would have been reasonably seen by the client as a failure on the part of the consultant, or at least as a set-back or disappointment.  In my view it does not make sense for Mr Tian Jr to rely on the increased rate of penalty as the base figure for the calculation of his fee, and his evidence that Mr Au nevertheless accepted it without any query or objection beggars belief.  And, as will be discussed later, even on Zhaotian’s own case, Mr Tian Jr had not promised any results.

-  Lastly on this topic, not only were there no documents from SAFE which referred to 34%, the letter accompanying the invoice dated 11 December 2006 signed by Mr Tian Jr himself still referred to SAFE’s proposed decision to impose a penalty of 30%, even though by that time, according to his evidence, he had known that SAFE was inclined to impose a penalty of 34%.

-  When cross-examined, Mr Tian Jr said that the letter accompanying the invoice (which was only half a page long) had been prepared in a hurry by an assistant, and he (Mr Tian Jr) had not read it carefully before he signed it.  However he also said he had already discovered the error made by the assistant (inserting 30% instead of 34%) but thought at the time that it was not necessary to explain it (Transcript p.181K).

-  In my view, that evidence does not have the ring of truth to it.  First, it would have been easy enough to amend “30%” to “34%” by hand.  Moreover, on Mr Tian Jr’s case, he had personally informed Mr Au of the proposed rate of penalty of 34% a few days ago, purportedly to justify his fee of HK$43m.  It would have been confusing, to say the least, to Mr Au (to whom the letter was addressed) to see the older, lower rate referred to again in this letter which accompanied the invoice.

50.2In view of the above, Mr Tian Jr’s evidence regarding the rate of 34%, which he alleged he explicitly stated to Mr Au at the lunch to justify his fee, leading to Mr Au’s agreement thereto, must be rejected.

51.Mr Zhang, for Foundation/TL, also claimed to have personal knowledge that at the lunch Mr Tian Jr informed Mr Au of the proposed penalty at the rate of 34%.  He was also privy to the letter as he was with Mr Tian Jr when the letter was prepared and signed. For the reasons set out above, his evidence must also be rejected.

52.I shall now discuss the inherent probabilities of Zhaotian’s and Foundation/TL’s case that Mr Au agreed, without query or negotiation, to Mr Tian Jr’s demand for HK$43m at the lunch on 1 November 2006.

53.1.First, Mr Au’s limit of authority at Henderson Land and its subsidiaries was HK$1m.  Whilst it is not suggested that that was known to Zhaotian, it is unlikely that an experienced banker and chief financial officer of a listed company would have made an agreement to pay a sum which he knew to be 42 times beyond the limit of his authority.  Contemporaneous documents showed that Mr Au sought written approval from Mr Lee Jr regarding smaller amounts. 

53.2.Further, HK$43m was a very substantial fee compared to those paid for the 1^st investigation.  Although SAFE had noted that this was a second offence, a fee of HK$43m was still 10 times more than the fee that BH had paid Foundation/TL for its services in the 1^st investigation, when the funds investigated (HK$1,024m) were 3 times more than the funds in the 2^nd investigation (HK$381m, as per the Supervisory Opinion dated 25 October 2006). 

53.3.More importantly, at the time of the alleged agreement on 1 November 2006, the penalty was still unconcluded.  In those circumstances, an agreement to pay HK$43m when the result was so uncertain would have been a leap in the dark, because Zhaotian had made no promise of results.

54.1.Zhaotian’s pleaded case was that the Henderson Companies agreed to pay HK$43m for Zhaotian to “try to lobby and persuade the relevant PRC authorities to reduce the fine to approximately 0.6% of the said total amount” (para.23, ASOC, emphasis added).  In the Further and Better Particulars, it was stated that Zhaotian was “supposed to speak to officers of the relevant PRC authorities with a view to persuading them to minimize or reduce the amount of the fine which might be imposed on the 2^nd Defendant ...” (para. 1.1, emphasis added).  In other words, Zhaotian’s pleaded case was that the fee of HK$43m was payable irrespective of whether Zhaotian would be successful in reducing the penalty, and whatever the final penalty would be. 

54.2.The witness statements (which stood as evidence in chief) were along the same lines, i.e. that the liability to pay the fee was not contingent upon success, and that the reduction of the penalty was no more than an “aim”.  In Mr Tian Jr’s witness statement, he said (para.20(1)):

“Ultimately, I (on behalf of the Plaintiff) and Mr Au (on behalf of the 1^st and 2^nd Defendants) agreed that:

(1) I and the Plaintiff should proceed with the aforesaid lobbying work, with the aim of persuading the relevant PRC authorities to lower/minimize the amount of penalty fine which might be imposed on the 2^nd Defendant (with the aim of lowering such fine to 0.6% i.e. the same level as with the 2005 Investigation, if possible)”. (Emphasis added).

54.3.Mr Zhang’s witness statement also said the following about the alleged agreement at the lunch (para. 20):

“Mr Tian then told Mr Au that he and the Plaintiff would be able to lobby and persuade relevant government authorities to minimize or reduce the amount of such penalty fine (with the aim of lowering such fine to 0.6% i.e. the same level as with the 2005 Investigation, if possible)”. (Emphasis added).

Mr Zhang’s evidence in court was to the same effect (Transcript p.87O-R). 

54.4.In other words, on Zhaotian’s case, Mr Au had unconditionally committed the Henderson Companies to pay more than 10 times the consultancy fees paid to Foundation, when the funds in question were only 1/3 of the funds in the 1^st investigation, with no parameters for the amount of reduction required for the fee to be earned, and without any indication or promise of the likelihood of success.  In my view, it was inherently improbable for a businessman, especially an experienced banker and the chief financial officer of a listed company, to have agreed to pay such a substantial sum outright in such circumstances.

55.1.It would be noted that in the course of the cross-examination of Mr Tian Jr, he was asked about a letter dated 23 May 2008 which he wrote on behalf of Zhaotian to the Central Liaison Office.  In that letter Mr Tian Jr had said that the HK$43m would be payable only if Zhaotian successfully dealt with the matter.  In the course of cross-examination, Mr Tian Jr confirmed that to be the case, i.e. if Zhaotian was unsuccessful, it would not receive the fee (Transcript p190 E). 

55.2.This evidence was directly contradictory to Zhaotian’s pleaded case and his witness statement which stood as evidence in chief.  Although Mr Tian Jr was re-examined, there was no evidence which resolved this serious internal contradiction in Zhaotian’s case.

56.Further there were no contemporaneous documentary records, eg reports, internal memoranda, notes, etc similar to Miss Chan’s report to Mr Au discussed above, reporting that such an agreement had been made.

57.In these circumstances, it must follow that Zhaotian has failed to prove its case. 

Authorization of Mr Ho?

58.I then come to the issue between BH of the one part and Foundation/TL of the other part (the subject-matter of HCA899/2009) as to whether BH had, through Mr Ho, authorised Foundation/TL to pay part of the “property settlement funds” to Zhaotian.

59.The burden is on Foundation/TL to prove that Mr Ho had authority to so act on behalf of the defendant companies.  There was only a bare assertion in Mr Ho’s statutory declaration that “it was and still is my understanding that in all dealings with Foundation and TL, I was fully authorized to act on behalf of the Henderson Group, including Henderson Land and Beijing Henderson”.  Mr Ho had retired, did not even know about the 2^nd SAFE investigation (Transcript p. 221) and it was common ground that he was not present at the meeting between Mr Tian Jr and Mr Au.

60.1.It was only when pressed in cross-examination that he alleged for the first time that he had oral authorization from Mr Lee Jr.  One would have thought that if this were true, that would have featured prominently in the statutory declaration,  especially as Mr Ho accepted that he had no authority otherwise (Transcript p.204).

60.2.Mr Au said after speaking to Mr Lee Jr, that Mr Ho was not so authorized (Transcript p.258).  This was not the subject of cross-examination. 

60.3.But more importantly in this connection, it would be noted that Mr Ho changed his evidence as to where Mr Lee Jr gave him the authorization.  He at first testified that this was done at Mr Lee Jr’s office at the company headquarters (Transcript p.204). Then when he was told Mr Lee Jr was not in Hong Kong during that period of time, he immediately changed his evidence to say that the authorization was given over a telephone call (Transcript p.240). 

61.1.Further the evidence of the “alleged authorization” was extremely unsatisfactory. According to Foundation/TL, the alleged authorization was given by Mr Ho in a letter from “Holdings” dated 30 November 2006 but there was no explanation why Holdings was involved. 

61.2.Further Mr Ho alleged that he had simply written the alleged authorization to Foundation/TL at home on a piece of unheaded notepaper, without making photocopies for record purposes for the Henderson Companies’ records, without informing persons directly involved such as Mr Au and Miss Chan, and without instructions being given to the accounts departments of the companies involved regarding this change in treatment of the “property settlement funds”.  The irregularity surrounding Mr Ho’s “alleged authorization” is plain to see, especially in a large organization such as that to which the defendant companies belonged where proper record keeping would be expected. 

61.3.There was no reason why if Mr Ho had indeed been duly authorized to give those instructions to Foundation/TL, he could not wait till he went to the office, and had the letter properly typed out and photocopied for the records and information of other personnel.  Mr Ho refused to answer these questions under cross-examination (Transcript p.235). 

62.Finally and perhaps most importantly, if BH had (through Mr Ho) authorized the “property settlement funds” to be paid to Zhaotian in part payment, the first such payments ($3.8m in cash and $0.5m by cheque) having been made on 4 December 2006, one would have expected this part-payment to have been reflected in the “invoice/receipt” presented by Zhaotian to BH on 11 December 2006 and the sum demanded to be reduced.  And yet the full sum of HK$43m was sought without any reference to the two payments already made.

63.In my view, there were so many defects in Foundation/TL’s case that they have failed to discharge the burden of proving that Mr Ho had the authority to authorize them to pay the “property settlement funds” to Zhaotian.

64.By reason of the matters set out above, I would dismiss the appeal of Zhaotian and Foundation/TL with costs with certificate for two counsel.

65.1.As for BH’s cross-appeal, it would indeed appear to be the case that the judge may have misunderstood its position when he said it “is not pressing for its counterclaim against Zhaotian”, as BH did assert its counterclaim (albeit extremely briefly) in the closing written submissions at trial.  However it seems to me that the counterclaim must be dismissed in any event.

65.2.First, as noted above, the counterclaim did not plead any cause of action.  It is not sufficient for one party (BH) to plead that another party (Zhaotian) has received some money from a third party (Foundation/TL), which the first party has not authorized, and to claim payment without pleading a cause of action.  For instance is it BH’s case that Zhaotian is liable to BH for money had and received, because it has still retained the funds?  Or is it BH’s case that the funds were imposed with a trust, such that Zhaotian was liable, for instance, in knowing receipt?  It is incumbent on a claimant (whether plaintiff or counterclaiming defendant) to plead exactly what cause of action it is pursuing.

65.3.Of course it is not just a matter of pleadings.  Evidence would have to be called to prove the ingredients of whatever cause of action was being advanced, and the judge would have to rule on that evidence.  None of that was done. No wonder then that the judge thought that BH was not “pressing” its counterclaim. 

65.4.For those reasons, I would dismiss BH’s counterclaim in HCA825/2008 and the cross-appeal.  However as the cross-appeal took virtually no time at all at the hearing of the appeal, I would make an order nisi that there be no order as to costs. 

Hon Chu JA: 

66.I agree with the judgment of Yuen JA.

Mr Kenneth CL Chan and Mr Billy NP Ma, instructed by Fan Wong & Tso, for the plaintiff in HCA825/2008 and for the 1st and 2^nd defendants in HCA899/2009

Mr Jat Sew-Tong, SC leading Ms Eva Sit, instructed by Woo, Kwan, Lee & Lo, for the 1^st & 2^nd defendants in HCA825/2008 and for the plaintiff in HCA899/2009