Lee Yuk Shing v. Dianoor International Ltd (in Liquidation)
Read the full judgment text of HCMP 2483/2011 on BabelCite. This High Court CFI judgment was delivered on 2 July 2015.
1. This is an action instituted as a result of an interpleader application taken out by Equipnet Asia Pacific Limited (“Equipnet”) and pursuant to the order of Master Reuden Lai dated 29 December 2011.
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HCMP 2483/2011 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF FIRST INSTANCE MISCELLANEOUS PROCEEDINGS NO 2483 OF 2011 ____________
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________________ J U D G M E N T ________________ INTRODUCTION Introduction 1.This is an action instituted as a result of an interpleader application taken out by Equipnet Asia Pacific Limited (“Equipnet”) and pursuant to the order of Master Reuden Lai dated 29 December 2011. 2.The Plaintiff bought seven lots of goods described as “rough diamond stones” (the “Stones”) at a total price of $1,050,000 plus a premium, ie auctioneer’s commission, of $105,000 at an auction held by Equipnet on behalf of the Defendant. The Stones turned out to be synthetic cubic zirconia and not rough diamond stones. The Plaintiff complained to Equipnet and demanded return of the purchase price. Equipnet refused and took out an interpleader application. Pursuant to the order of Master Reuden Lai, Equipnet paid the purchase price into court after deducting its agreed costs of the interpleader application of $40,000. The Master ordered the action to continue as between the Plaintiff and Defendant as if it had been begun by writ; and that the costs of the interpleader application as between the Plaintiff and the Defendant shall be costs in the cause. The parties’ case 3.The Plaintiff’s causes of action are: (1) breach of contract; (2) fraudulent misrepresentation; and (3) misrepresentation pursuant to section 3 of the Misrepresentation Ordinance (“negligent misrepresentation”). The remedies sought against the Defendant are, inter alia, a declaration that he is entitled to demand return of the purchase price and premium; alternatively, a declaration that he is entitled to rescind the agreement of sale of the Stones; and order for release of the money paid into court by Equipnet; and damages. In essence, he is seeking to set aside or avoid the contracts of sale and return of the price. In addition, in his opening speech, Mr Wong, counsel for the Plaintiff, argues that no contracts had been concluded. 4.The defence is one of total denial and putting the Plaintiff to strict proof, even as to his identity as the bidder, purchaser, his payment of the purchase price for the Stones and that the Stones were not genuine rough diamond stones. The defence also denies any representations made by Equipnet as being attributable to the Defendant. 5.The more specific defences are as follows. The Defendant, through its liquidators (“Liquidators”), had exercised proper care in the context of a sale by liquidator to bring to the notice of the Plaintiff the Notice to Bidders and Conditions of Sale containing exclusion of liability clauses. The parties entered into a valid and binding contract in the terms of the Conditions of Sale. The Defendant was not in breach of contract. The Defendant denies fraudulent misrepresentation and avers that, through the Liquidators, it acted reasonably in the circumstances and believed the representations to be true. The sale was not a sale by description and there was no misrepresentation or warranty that the Stones were genuine. The Defendant also avers that the Plaintiff, being an expert in jewellery, was not relying on the expertise of the Defendant. It also disputes if the Plaintiff is the proper plaintiff in that he was not the party who provided the consideration for the purchase of the Stones. 6.Though not specifically pleaded, the general theme of the defence, as repeatedly stressed by Mr Sheppard, counsel for the Defendant, is that the auction was a sale by liquidator on behalf of a company, which by reason of its insolvency and impending dissolution, will offer no redress in the event of the contract being broken leading to loss. This theme is based on Stewart v Engel & Another[1]. The Liquidators’ position is that they were not running the business of the Defendant; they had no knowledge that the Stones were not rough diamond stones; they had power of sale under section 199(2)(a) of the Companies Ordinance; and their duties were to realise the assets of the Defendant to paid its creditors. Hence, they are entitled to retain the purchase price for the benefit of the Defendant’s creditors, regardless whether the Stones were rough diamond stones. 7.With respect, by characterising the sale as a sale by liquidator, Mr Sheppard lost sight of the real issues of this action. First, the Plaintiff is not suing the Liquidators personally, but against the Defendant in liquidation. Second, the Plaintiff is not suing for breach of contract and damages as such. This is essentially an interpleader action. There is money paid into court, which is the purchase price paid by the Plaintiff for the purchase of the Stones. The court is being asked to determine to whom the money should go. This is like a proprietary claim. The Plaintiff is not trying to put his hands into the general pool of a company in liquidation seeking damages to the detriment of the creditors. He is not seeking redress from the Defendant in liquidation. Third, Mr Sheppard also mixes up the identity of the Liquidators with that of the Defendant. He rightly argues that the liquidator does not provide a better target in a sale by liquidator because the proper contracting party is the company in liquidation. But when he comes to the issue of the company’s knowledge of falsity of the representation in a claim for deceit or misrepresentation, he conveniently shifts the focus to the lack of knowledge on the part of the liquidator. Given the circumstances in this case, Mr Sheppard’s characterisation of the sale is, to a large extent, misplaced. The background 8.Dianoor International Limited (in liquidation), the Defendant herein, is a member of a group of companies known as the “Dianoor Group”, a very successful jewellery business with representation around the world. The Defendant, together with Dianoor Jewelcraft Limited (“DJL”) and Checkers Limited (“Checkers”), collectively referred to as (“DIL Group”) formed the Hong Kong arm of the Dianoor Group. The Dianoor Group was under the control of Mr Iqbal Mubarik (“Mubarik”). 9.In 1998, divorce proceedings between Mubarik and his wife commenced in England. Mubarik was ordered by the High Court of England to pay his wife a lump sum of GBP4,875,000 and further sums of maintenance. The assets and business of Mubarik were settled into a Jersey trust. Mubarik did not pay. That resulted in appointment of Mr Mawer and another partner of an accounting firm as joint receivers and managers of the Jersey trust. 10.Believing that the DIL Group had substantial assets and was Mubarik’s source of wealth, proceedings were commenced in Hong Kong to gain control of the DIL Group. Mr Mawer, Mr Cowley and Mr Middleton (“Middleton”) of an associated accounting firm in Hong Kong, KPMG LLP, (“KPMG”) were appointed as receivers and managers of, inter alios, the Defendant by the order of Kwan J (as she then was) on 25 April 2008. In the course of their investigations into the DIL Group, the receivers found that the companies in the DIL Group were in fact insolvent, and that inventory with substantial book value had been apparently sent “on consignment” to other entities within the Dianoor Group in jurisdictions where enforcement of rights is difficult. 11.Subsequently, on 3 December 2008, employees of DIL and DJL petitioned for the winding up of these companies based on the awards made by the Labour Tribunal for non-payment of wages. Mr Mawer, Mr Cowley and Middleton were then appointed as provisional liquidators by the order of Barma J (as he then was) on 23 December 2009 and then as Liquidators on 9 July 2010. Credibility of witnesses 12.The Plaintiff, his Uncle, Lui, and Lo testified. Their evidence is not in serious dispute. It is well corroborated by contemporaneous documents. Had it not been for the Defendant putting the Plaintiff to strict proof, their evidence, or at least a very substantial part of it, would not have been necessary. They were searchingly cross-examined by Mr Sheppard, not so much for the purpose of strict proving the Plaintiff’s case, but more for the purpose of building the Defendant’s case that the Plaintiff was not the bidder or purchaser and has not paid the price or repaid whoever paid it for him, or attacking the exhibit chain relating to the Stones. I find all of them are honest and unsophisticated witnesses. I accept their evidence. 13.The Plaintiff expert, Professor Ou Yang of Hong Kong Gems Laboratory was called to give expert opinion that the Stones were not genuine rough diamond stones. Professor Ou Yang had a bachelor and master degree and gemmology qualification from London. Mr Sheppard does not dispute her qualification as an expert in gemmology. I find she was qualified to give expert evidence in gemmology by reason of her qualification and expertise. I find her straightforward, frank and sincere. Based on refractive index and other tests, Professor Ou Yang was satisfied that the Stones were synthetic cubic zirconia and not rough diamond stones. I accept her evidence. The remaining stone from the collection of eight stones in the Defendant’s possession, of which the seven Stones bought by the Plaintiff formed part, had been examined by the Defendant’s expert and confirmed to be fake. This lends support to Professor Ou Yang’s expert opinion. However, despite that, the Defendant still insisted on the Plaintiff strict proving that the Stones were also fake. It was only until a very late stage of the proceedings and in answer to the question from the bench that Mr Sheppard confirmed that he does not dispute that the Stones are not rough diamond stones. But by then it was too late as Professor Ou Yang had already come to Hong Kong from China. 14.The Defendant called two witnesses, Mr Francis Yau (“Yau”) of Equipnet and Middleton, one of the Liquidators. For reasons as given in my analysis of the evidence, I am impressed by the honesty and impartiality of Yau of Equipnet. I accept his evidence. 15.Also for reasons as given in my analysis of the evidence, I find Middleton an incredible witness and reject most of his evidence. He gave a very impressive witness statement. But when his evidence is tested against the totality of the evidence, in particular the incontrovertible evidence, it is manifestly clear that his evidence is convenient afterthought in an attempt to retain the purchase price paid for the Stones for the benefit of the general creditors of the Defendant: see, for example, my finding on his recklessness. Before coming to this conclusion, I have reminded myself that as liquidator he is an officer of the court, and I should be very careful before reaching any adverse conclusion about his credibility. This conclusion, which I find most difficult to make is, unfortunately, one which I am duty bound to make in the light of the totality of the evidence. The events leading to the auction 16.Upon their appointment as receivers, Middleton secured the assets of the Defendant on 25 April 2008. On 2 May 2008, he and his staff of KPMG arranged for Chubb Security to open the Defendant’s vault. The vault was accessible only to four senior managers of the Defendant, including Mr Ziaudeen (“Ziaudeen”). They took an inventory of the various items of jewellery found in the vault in the presence of an independent solicitor, Mr Laracy. Among the jewellery was a collection of eight stones inside a piece of folded paper (“the eight stones”), seven of which were the Stones subsequently sold to the Plaintiff. 17.On 3 May 2008, a staff of KPMG arranged for a gratuitous survey of the jewellery items found inside the vault to be carried out by Mr Alex Wong (“Wong”), a graduated gemmologist and assistant manager of the Third Yau Ma Tei Branch of Chow Tai Fook Jewellery Co Ltd. Wong verbally advised that his rough estimate of the value of all the jewellery items was about $7 million. He then confirmed his estimate by letter, but there was no breakdown of the value of the individual items. 18.On 3 June 2008, the receivers obtained an order from court for the sale of ten items of jewelleries to meet the Defendant’s expenses. Nine of the items had been valued by Hong Kong Gems Laboratory to be worth $1,056,200. The remaining item had not been valued because of risk of damage during the testing process. The ten items were subsequently sold for $648,000. Middleton said that the valuation and sale did not reveal anything which would suggest to him that the Defendant dealt in items that were anything other than genuine. 19.In mid-April 2010, Middleton decided to sell all the jewellery items. He instructed his staff to initiate discussion about an auction with Yau of Equipnet, a reputable auctioneer whom Middleton and other insolvency practitioners of KPMG had instructed on previous occasions. Yau was a director of Equipnet in charge of auction and valuation services. He had 27 years of experience in the auction industry. 20.Delivery of all the jewellery items to Equipnet was completed on 6 September 2010. The jewelleries were delivered together with a collection list prepared by KPMG in which the eight stones were described as “diamond stones (8 pcs) 70.59 carats”. 21.With the assistance of the Liquidators’s solicitors, Middleton finalised the terms of an Exclusive Public Auction Sale Agreement with Equipnet (the “Auction Agreement”), which Yau and Middleton respectively executed on 15 and 16 November 2010. As the Liquidators do not have any expertise or training in assessing or valuing the jewellery items, Middleton left it to Equipnet to identify and evaluate each item for the purpose of establishing a reserved price and for preparation of the auction catalogue (the “catalogue”). In the course of preparing the catalogue, Yau labelled the eight stones identified as Lots 94 to 101 in the catalogue as “Rough Diamond Stones”. Attached to the catalogue was a copy of Equipnet’s Notice to Bidders and Conditions of Sale. 22.Equipnet placed two advertisements for the auction in the South China Morning Post in English on 16 and 22 November 2010 and a number of advertisements in Chinese in the Oriental Daily, Hong Kong Economic Times, Apple Daily, Ming Pao and Singtao Daily on diver occasions between 16 and 23 November 2010 inviting the public to the auction to be held on 24 November 2010 at 1:30 pm at the Marco Polo Prince Hotel in Tsimshatsui, with preliminary viewing between 10:30 am and 1:30 pm. The jewellery items for auction stated in the advertisement included “eight rough diamond stones of a total weight of 70.59 carat”. 23.The Chinese advertisement read as follows:
The English text of the advertisement was basically similar. It read:
24.On 23 November 2010, the Plaintiff’s uncle (the “Uncle”) was informed by a trader friend, Mr Steven Lui (“Lui”), about the advertisement. The Uncle then informed the Plaintiff. They decided to attend and bid for rough diamond stones at the auction. 25.At 10 am in the morning of 24 November 2010, the Plaintiff and his Uncle attended the Xiamen Suites of Marco Polo Prince Hotel with a view to inspect the eight stones and to test them with a diamond testing pen which they brought along. He presented his business card describing him as “Simon Lee of Kalencody Company”. After completing the registration formality he was given a bidder number and a catalogue showing the items available for auction. He and the Uncle saw the eight stones on display at the previewing session. The eight stones were each placed inside a two layers of sealed transparent plastic bags. He asked to have the stones taken out for examination by his diamond testing pen. The female staff refused. After a visual examination, the Plaintiff left with his Uncle to join Lui and his Uncle’s friend, Mr Lo Siu Fung (“Lo”), for lunch. The auction 26.After lunch, the four of them returned to the auction room. Mr Wee from Singapore was engaged by Equipnet to act as the auctioneer. The auction commenced at 1:40 pm with the auctioneer asking the potential bidders in English whether they had difficulties in understanding the English Language. Yau followed up by asking in Chinese if anyone required Chinese translation. There was no response from the floor. The auctioneer allowed the potential bidders about five minutes to read the catalogue, Notice to Bidders and Conditions of Sale and then went through the main terms and conditions, in particular the “As Is” clause. He invited the potential bidders to raise questions, but no question was raised. Then the auction commenced. 27.Before the bidding of each item began, a picture of the item was projected on the screen and the auctioneer gave a short description for the item. Each of the eight stones was described by the auctioneer as “rough diamond stone” when its picture was projected on the screen. Each stone had a reserved price which turned out to be around 60% to 70% of the final bid price. The Plaintiff successfully bid for seven of the eight stones for a total price of $1,155,000 including 10% premium. His bid for the remaining one was unsuccessful as it did not meet the reserved price and that item was withdrawn from the sale. Lui successfully bid for four other items at a total price of $1,068,100 inclusive of premium. 28.After the auction, Equipnet issued to the Plaintiff one Buyer Invoice in the Plaintiff’s name “Simon Lee, Kalencody Company” for all the eleven items. The Plaintiff and his party then went over to a nearby branch of Hong Kong and Shanghai Banking Corporation (“HSBC”) where Lo paid for the Plaintiff’s purchase by direct bank transfer from his account with HSBC to Equipnet’s designated bank account with HSBC. The Plaintiff was issued a receipt. He and his party then collected the Stones and other items bought and left without examining the Stones with his diamond testing pen. The discovery 29.Then the Plaintiff and his party went to Lo’s jewellery shop in Jordan where they opened the plastic bags to take a look at the Stones. They found something odd about the Stones, in particular, they appeared to be too smooth and perfect for rough diamond stones, a feature which they could not have observed through the double layer plastic bags. They were alarmed and decided to have the Stones examined by a gemmological testing centre in Shenzhen. They did not even think it necessary to have the Stones tested with their diamond testing pen. 30.On the following day, the Plaintiff took the Stones to Shenzhen for examination by Gem Testing Centre of The Chamber of Jewellery of All-China Federation of Industry and Commerce. On examination, the Stones were found to be synthetic cubic zirconia. 31.On 26 November 2010, the Plaintiff complained to Equipnet that the Stones were fake, but to no avail. He then made a report to the police. 32.KPMG caused the remaining unsold stone out of the collection of eight stones to be examined by Asian Gemmological Institute and Laboratory Limited. It was confirmed to be made of synthetic cubic zirconia. 33.Despite much negotiation, the Defendant and Equipnet refused to return the purchase price. Equipnet then took out the interpleader proceedings on 1 December 2011. Pursuant to the direction of Master Reuden Lai, the Plaintiff commenced the present action. WHETHER THE PLAINTIFF IS A PROPER PARTY 34.By paragraph 12 of the Defence, the Defendant puts the Plaintiff to strict proof that he was bidder and purchaser of the Stones, that he paid the purchase price and suffered loss. The Plaintiff’s case, as the totality of the evidence revealed, is that he, his Uncle, and Lo entered into a joint venture to purchase rough diamond stones, process them into diamond jewellery for sale at Lo’s shop and share the profit. The mode of joint venture was on a case-by-case basis. During lunch they agreed the price to bid for the Stones and went to bid in the auction. The Plaintiff bid in his personal capacity. Lo paid the price from his bank account in the first instance. Then the Uncle repaid Lo. 35.Mr Sheppard tries to capitalise on the Plaintiff’s plea that he bid and purchased in his personal capacity. His first attack is that the bidder was not the Plaintiff in his personal capacity, but Kalencody Company represented by the Plaintiff which, according to the business registration record, is the name of the business under which the Uncle trades. Mr Sheppard also refers to the Buyer Invoice describing the purchaser as “Simon Lee, Kalencody Company” and not the Plaintiff in his personal capacity. In paragraph 13 of the Plaintiff’s Reply, the Plaintiff responded as follows:
36.The undisputed evidence was that the Plaintiff presented his business card to register at the auction and was given a bidder number which he used to bid for the Stones. Hence, by this plea and by his evidence, the Plaintiff was saying that he was the same “Simon Lee” as a natural person who raised the bidder number and bid and was issued the Buyer Invoice and not Kalencody Company. Other than relying on the Plaintiff’s business card and Buyer Invoice, the Defendant offered no evidence to contradict what the Plaintiff asserted. Under cross-examination, the Uncle never admitted that the Plaintiff was bidding on behalf of his Kalencody Company. The Defendant tendered no evidence that Equipnet was not dealing with the natural person of the Plaintiff but with Kalencody Company represented by the Plaintiff. When two persons liaise and make a contract face to face, prima facie they contract in their personal capacity. I accept the Plaintiff’s evidence that the business card was used to describe who he was and what his contact particulars were and not that Kalencody Company was the bidder. I also accept the Uncle’s evidence that the Plaintiff bid in his personal capacity and not on behalf of his Kalencody Company. Obviously, the Buyer Invoice was issued by Equipnet based on the information on the business card and not reflective of the parties’ understanding as to who the purchaser was. 37.Mr Sheppard’s attack does not end there. He argues that the Plaintiff was confused as to both the existence and status of an incorporated company, Kalencody Company Limited and an unincorporated entity, Kalencody Company, under both of which business names he trades or has apparently traded and with JC Ocean which is operated by his Uncle and which shares the same business premises with Kalencody Company. With respect, this criticism is unfair, unsubstantiated and in any event irrelevant to the issue as to the Plaintiff’s identity as the bidder and purchaser. 38.The Defendant does not dispute the evidence that the Plaintiff registered himself at the auction, was given a bidder number, and successfully bid for the Stones. More importantly, it is the Defendant’s own evidence that Equipnet issued a Buyer Invoice to the Plaintiff in the name of “Simon Lee, Kalencody Company”. That was in accordance with the particulars of the Plaintiff given at the time of registration. Who else could the person to whom the Buyer Invoice was issued be other than Simon Lee, ie the Plaintiff, who raised his bidder number to bid and against which the auctioneer’s hammer fell? Again, according to the Defendant’s evidence, the Buyer Invoice was paid by bank transfer and against that payment Equipnet released the Stones to the Plaintiff. Who else could the purchaser be but the Plaintiff? This “Kalencody issue” is just splitting hair. 39.Mr Sheppard’s more substantial attack is that the Plaintiff was not bidding on his own account or on behalf of Kalencody Company, but in the capacity of the joint venture with his Uncle and Lo. With respect, without finding more about the nature or terms of the joint venture, whether by his own investigation or by cross-examination, such attack cannot be meaningfully advanced. As the Plaintiff put it, the joint venture was on a case-by-case basis. By that I understand to mean item-by-item basis, which is not at all an uncommon way of joint venture for small entrepreneurs. How the three parties to the joint venture would share in the profit and costs was not explored. On the state of the evidence, there is nothing to cast any doubt on the Plaintiff’s case that the joint venture was for the Plaintiff to contribute rough diamond stones, for the Uncle, or perhaps with the Plaintiff, to contribute skill and labour, for Lo to provide finance and sales outlet facilities, and then for them to share the profit in such proportion as is appropriate to their respective contribution. As the evidence revealed, there were different joint ventures or partnerships between different combinations of the Uncle, Lo, Lui and the Plaintiff in relation to different items. 40.Mr Sheppard argues that the Plaintiff’s evidence is inconsistent with Lo’s in that at one stage Lo said that Lui and the Uncle (not the Plaintiff) were his partners and that the business had bought the ‘items’ (Transcript 52A-F); but later, asserted that the Uncle, the Plaintiff and he shared ownership of the ‘Goods’ as ‘partners’ (Transcript 52B) and in a partnership (Transcript 52P-Q). 41.Lo’s evidence might appear confusing to Mr Sheppard. But having seen the witness and heard the cross-examination, and having had the benefit of being bilingual, I am satisfied that properly understood, there was no inconsistency in Lo’s evidence. Hereunder is the Transcript at page 52:
Pausing here, with my annotation in italics, it is clear that Q1 to Q3 as well as A1 to A3 were relating to the other jewelleries bought by Lui in partnership with the Uncle and not the Stones bought by the Plaintiff. To make it double sure that the parties understood the evidence as I understood it above, I asked Lo which “Mr Lee” he was talking about. Then he volunteered answer to court (AC) that the Uncle was part of the partnership in buying the other lots of jewelleries, while the Plaintiff bought the Stones. I think that is clear enough. This part of his evidence is consistent with the Plaintiff’s. 42.Mr Sheppard’s cross-examination continued as follows:
Again pausing here, Mr Sheppard’s misunderstanding of the evidence is obvious. 43.After my clarification, Mr Sheppard continued as follows:
Again pausing here, Mr Sheppard was cross-examining about the other jewelleries which were referred to in the invoice issued to Lui, which Lo admitted to have been bought by his partnership with Lui and the Uncle. Lo never mentioned that the Plaintiff was a partner in that partnership. It was the Plaintiff’s evidence that Lo, his Uncle and he himself were in a joint venture buying rough diamond stones to process into jewellery for sale in Lo’s shop. I think, with respect, Mr Sheppard was confused. Properly understood, the evidence is that there were many different partnerships or joint ventures on an item-by-item basis. I find Lo’s evidence consistent with the Plaintiff’s. 44.Next, Mr Sheppard criticises the Uncle’s evidence as inconsistent with the Plaintiff’s in that the Uncle said he purchased the Stones. On the face, this is inconsistent with the Plaintiff’s evidence. This inconsistency is too blatant to exist. The Uncle was in court throughout with the Plaintiff. He ought to have heard the Plaintiff’s evidence that he was the bidder and purchaser. He would not have knowingly departed from the Plaintiff’s evidence. On the fact, he was very closely related to the Plaintiff. He and his brother married respectively his wife and her sister. He lived with the Plaintiff under the same roof, treated him as his son and ran a business with him. It is understandable that he would treat what the Plaintiff did in their business as if it was his own act and vice-versa. Thus by a slip of tongue, and perhaps annoyed by the way cross-examination took, the Uncle said he purchased the Stones. I give no weight to that inconsistency. I also bear in mind the “Kalencody issue” and am satisfied that the Uncle did not mean he purchased the Stones through Kalencody Company. 45.In his untiring effort, Mr Sheppard made another attack on the Plaintiff’s evidence based on payment for the Stones. The undisputed evidence was that Lo paid by making a transfer from his bank account to the designated bank account of Equipnet. Under cross-examination, the Plaintiff admitted that he knew very little about Lo and did not know if Lo had been repaid. He said if “we” paid Lo, it would have been done through JC Ocean. I give no weight to this answer because it was a speculative answer the Plaintiff was forced to make as he did not actually know if the Uncle had repaid and how the Uncle repaid. The Uncle said he and the Plaintiff had repaid Lo, but later he said he was the one who was responsible for repaying Lo. Lo also confirmed that it was the Uncle who repaid him. Mr Sheppard again criticises the Plaintiff’s and the Uncle’s evidence as inconsistent and confusing and that they blurred the division between the three companies or businesses belonging to or operated by them, namely JC Ocean, Kalencody Company Limited and Kalencody Company. He criticises the lack of documentary evidence in support of the repayment to Lo in terms of receipts, cheques, bank statements, ledgers, statements or records in any other form whatsoever. He criticises the ambivalent nature of the evidence as to how the repayment was effected in terms of the party or parties, partnership, company or companies alleged to have made the repayment. On the basis of the state of the evidence, Mr Sheppard submits that the Plaintiff, not having paid for the price, suffered no damage and has no claim. 46.Despite some ambiguity or confusion, the common thread in the Plaintiff’s and his witnesses’ evidence is that Lo paid for the Stones on behalf of the Plaintiff and the Uncle repaid Lo pursuant to their prior arrangement. There is no dispute that the Defendant received payment. There is no suggestion by the Defendant that the payment it received was by someone else for a purpose other than the sale of the Stones. There is no suggestion that the Defendant has not received the purchase price for the sale of the Stones. This way of attack or “putting to strict proof” bears the hallmark of bad faith. 47.The real thrust of Mr Sheppard’s submission is that the Plaintiff was not the purchaser because he did not pay for the Stones which were paid by Lo but the Plaintiff did not repay Lo, even though his Uncle did. As a matter of law, consideration has to move from the promisee. But so long as the promisee caused the consideration to be received by the promisor, it matters not if the purchase was financed by another. It matters not if the promisee did not actually pay the purchase price but caused a third party to pay for him. In real life, purchase price for landed property is often paid by a mortgagee, and it is not uncommon for buyers to cause payment to be made by a third party. It also does not even matter if in breach of his promise to the paying party, the promisee does not repay the paying party. An everyday example is the wife making purchases and paying with her or her husband’s credit card autopaid from the husband’s bank account. Can it fairly be said that the wife was not the purchaser, had no locus standi to sue and suffered no damage for breach of the contract of sale? Any court would have dismissed Mr Sheppard’s argument as splitting hair to the extreme. 48.On the fact of the present case, consideration has moved from the promisee in that the Plaintiff personally or through his uncle has caused consideration to be paid to the Defendant. Whether Lo has been repaid or repaid by the Plaintiff personally and physically is totally beside the point. But on the evidence, Lo has indeed been repaid by the Uncle. According to the Uncle, the relationship between him and Plaintiff is so very close that their funds and their company’s funds all belong to the family pot. They put money into the family pot and draw what they or their business needed from it. Thus, as matter of fact the Plaintiff has repaid Lo. This “repayment issue” is wholly frivolous and vexatious. 49.Mr Sheppard says that the Liquidators raised this plea for the benefit of the court and for drawing the court’s attention to the question of whether the Plaintiff has locus standi to sue or has suffered any damage. Even on the defence case, the Plaintiff bid and Equipnet received payment for no other purposes but for the sale of the Stones. What is there to put the Plaintiff to strict proof, I wonder? What is the challenge to the Plaintiff’s locus standi, if the Plaintiff did not produce documentary evidence of repayment to Lo or had not personally or physically repaid Lo? This plea shows a total lack of good faith on the part of the Liquidators in the conduct of their defence and how desperate the Liquidators are. If Lo were to sue as the paying party, Mr Sheppard would have argued, in the same spirit of assisting the court, that Lo has no locus standi as he was not the bidder against whose bid the hammer fell, resulting in no one being able to sue for any breach. The depth cross-examination was taken and the seriousness this defence was argued was regrettable. With greatest respect to Mr Sheppard, this plead is frivolous and vexatious and should never have been pleaded or argued at all. THE CLAIM IN CONTRACT Introduction 50.The Plaintiff’s claim is that he is entitled to return of the purchase price because the contract entered into between him and the Defendant was a specific contract for purchase of rough diamond stones but the Stones delivered were not. Mr Wong relies on Lord Abinger’s often quoted dictum in the Chanter v Hopkins[2] that “if a man offers to buy peas of another, and he sends him beans, he does not perform his contract”. In that vein, Mr Wong argues that this is a case of non-fulfilment and the purchase price ought to be returned to the Plaintiff because of total failure of consideration. 51.Mr Sheppard’s reply is that Chanter v Hopkins was a case which preceded the passing of the Sales of Goods Act 1893 in England which would apply to a sale by description and is not applicable to the facts of this case. He argues that this is not a case of sale of goods by description, but a sale of specific goods by liquidator on “as is, where is, with all faults” basis where the description was not relied upon. He also relies on the exclusion clauses contained in paragraph 6 of the Notice to Bidders and clauses 4(a), 7(a), 11(a), (b) and (d) of the Conditions of Sale. 52.In my view, despite its antiquity, Chanter v Hopkins is still good law. Whether a sale is one of specific goods or a sale by description depends on the intention of the parties. It is a question of construction of contract. Similarly, whether exclusion clauses apply is, subject to certain statutory provisions and principles of law which have been developed as a means of controlling improper use of such clauses, also a matter of construction of contract. I shall first turn to some legal principles applicable to exclusion clauses and then turn to construe these clauses to determine if they have the effect of excluding liability for misdescription or warranty that the Stones were rough diamond stones; if they have that effect, whether they are applicable to the contract; and to the extent they are applicable, whether the parties intended to enter into a contract for sale of goods by description or contract for sale of specific goods. Control of Exemption Clauses Ordinance – the reasonableness test 53.Mr Wong submits that the clauses relied on by the Defendant are terms purporting to restrict liability for representations which are therefore subject to the scrutiny by the court under the reasonable provisions of the Control of Exemption Clauses Ordinance. However, Mr Sheppard submits that the Ordinance does little to protect the consumer within the confines of an auction room. It is not clear what scrutiny Mr Wong is referring to. He is most likely referring to the protection under section 11(2) of the Ordinance, which provides that the seller’s implied undertakings as to conformity of goods with description or sample, or as to their quality or fitness for a particular purpose cannot be excluded or restricted by reference to any contract term, which is the focal point of this issue in the dispute. If so, he is clearly wrong, because section 11(3) provides that as against a person dealing otherwise than as consumer, such liability can be excluded or restricted by reference to a contract term, in so far as that term satisfies the reasonableness test set out in Schedule 2 to the Ordinance; and section 4(2) provides that on a sale by auction the buyer is not in any circumstances to be regarded as dealing as consumer. Thus, quite apart from the fact that the Plaintiff presented himself as a trader in jewellery by presenting his business card for registration, this was a sale by auction, he was dealing otherwise than as consumer. Such liability can be excluded by the terms contained in the Notice to Bidders and Conditions of Sale, subject to the reasonableness test set out in Schedule 2[3]. 54.Besides the criteria lay down in Schedule 2, the common law has also developed some principles of construction applicable to exclusion clauses. The general principle in construing a contract was stated by Lord Hoffmann in Investors Compensation Scheme Ltd and West Bromwich Building Society[4] and adopted by his Lordship in Jumbo King Ltd v Faithful Properties Ltd & Ors[5], when delivering his judgment of the Court of Final Appeal. The principle is that construction of contract is the ascertainment of the meaning which the contract would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract. On the other hand, exclusion clauses are often so inconsistent with the implied or presumed intention of the parties that the law requires not only that the party introducing and seeking to rely on an exclusion clause bears the burden of proving that the other contracting party knows or ought to have known of its existence (which is re-stated in factor (c) of Schedule 2), but also that the terms of the exclusion clause must be spell out in clear and unambiguous language. Lastly, the contract in issue is a unilateral contract. It was drafted by the auctioneer. A bidder has no input into the terms of the contract. He has to take it or leave it. The party drafting the contract has to make sure that any terms in its favour or any terms disadvantageous to the other party must be put in clear unambiguous language. Should there be any ambiguity, it must be resolved in favour of the bidder or against the auctioneer. The contra proferentum rule applies. 55.With the auction being a sale by liquidators of jewelleries of a jewellery business as the background and with these principles of construction in mind, I turn to construe the exclusion clauses relied on by the Defendant. Clause 1 of the Conditions of Sale 56.Clause 1 of the Conditions of Sale reads:
57.Though clause 1 referred to the “Notice to Tenderers”, it is clear from the context that it meant the Notice to Bidders. Thus by this clause the representations in the advertisement, catalogue and videotape presentation are all excluded from being the terms of the contract of sale. The Notice to Bidders and the Conditions of Sale are the only documents containing the terms and conditions of the contract. Paragraphs 1 and 6 of the Notice to Bidders 58.Paragraphs 1 and 6 of the Notice to Bidders read:
59.An important plank of Mr Sheppard’s argument is that the term “as is, where is, with all faults” is sufficient to exclude any express or implied warranty that the stones were rough diamond stones. But he does not quote any authority in support of his proposition. 60.The word “as” is defined in the Shorter Oxford English Dictionary[6] to mean:
The dictionary meaning of the term “as is” therefore means “in the same state or condition as something already is”. That term alone or in combination with other similar terms like “as is, where is, with all faults” is a term commonly used to describe a sale transaction in which the seller offers goods in the present, existing condition to prospective buyers without any warranty as to quality. The buyer assumes the risk on the quality of the goods and accepts the goods with all faults, whether immediately apparent or latent. For example, in a furniture shop, an item on display as being sold “as is” means that the item is sold in the same condition as the buyer sees it, with no implied warranty such as quality or fitness for the purpose, etc. The buyer has no recourse to the seller if he later discovers any latent defect in the goods. But I think the term is not sufficient to negative an express description of the nature of the goods. For example, if a car on display is described as “Porsche Carrera, made in Germany” and sold “as is”, the term is sufficient to exclude the seller from liability arising out of the quality and condition of the car. Even if the engine stalls and seizes as soon as it was driven out of the showroom, the buyer has no recourse against the seller. But the term does not negative the description that the car is a Porsche Carrera made in Germany. Even if the car runs in perfect condition, but if it was a replica made in the United States, the buyer can claim rescission or damages. 61.In my view, the term “as is, where is, with all faults” means that the goods sold under such a term is sold in its present state or existing condition as to quality, including any defects whether apparent or latent. It excludes any implied warranty as to quality and fitness for the purpose, but not as to the nature of the subject matter of the sale. It does not negative any description as to the nature of the goods ie a description of what the goods are, if such description is a term of the sale. In the present case, the stones were described as “rough diamond stones” of a certain approximate weight. The term excludes any implied warranty as to quality, such as brightness, colour, absence of impurities, absence of defects such as damage, cracks etc, and as to quantity, namely the approximate weight; but is not sufficient to negative or exclude an express or implied term of the contract as to the nature of the subject matter of the sale, ie the stones were rough diamond stone as is understood in the trade. Thus, the first sentence of paragraph 6 is a clause excluding warranty as to quality of the goods to be sold, which has nothing to do with description as to the nature of the goods, ie what they are. 62.The second sentence takes away any warranty which could be implied by representations in illustrations and pictures or any warranty as to weight. It has nothing to do with description of the goods. Nothing turns on this particular term. 63.The third sentence seeks to exclude liability for misdescription of the subject matter of sale. The crucial word is “description”. I have not been referred to any precedents about the meaning of this word. Resort again has to be made to the Shorter Oxford English Dictionary[7] to find out its ordinary and common meaning. The dictionary gives the following meanings which are relevant:
The essence of “description” under the first meaning is appearance, portraiture or non-essential attributes or quality. For simplicity, I refer such descriptions as descriptions as to quality. The essence under the second meaning is the combination of attributes which defines a class. This includes description of natural things, living or non-living, such as a cat, or rice grains; or elements or compounds, such as gold, silver, crystalline carbon including diamond stones or rough diamond stones, or compounds such as water; or man-made objects which has a combination of certain attributes, such as a motor car, or a table. These are descriptions as to the nature of the subject matter. 64.Thus, the word “description” in the third sentence of paragraph 6 may refer to description as to quality, such as appearance, colour, brightness, absence of impurities, quantity such as weight and dimension etc of the item in the catalogue; or may refer to description of the nature of the subject matter such as rough diamond stone; or both quality and nature of the subject matter. 65.It would be tempting to think that this sentence therefore excludes liability for misdescription as to quality, quantity and as to nature of the goods. This may well be the subjective intention of the Liquidators or Equipnet. But this is not the way a contract is to be construed. Construction of contract is, as Lord Hoffmann said, ascertaining the intention of the parties from the document and the factual matrix. The meaning which a document would convey to a reasonable man is not the same thing as the meaning of its words. My reference to the dictionary meanings is only part of the process of construing the exclusion clauses and the contract. The meaning of words is a matter of dictionaries and grammars; the meaning of the document is what the parties using those words against the relevant background would reasonably have been understood those words to mean: see Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd[8]. A document must be construed against the factual matrix. 66.Much has been stressed by Mr Sheppard that this was a liquidator’s sale. But that was not all. It was not a sale by a liquidator of some seized goods of unknown origin or ordinary assorted goods of different varieties or sale of some goods, furniture and office items of an ordinary company which collapsed. It was a liquidator’s sale of jewellery items of, what the Liquidators admit, a reputable international business selling quality jewellery items. And there were the advertisements. In the factual matrix of a reputable auctioneer calling for an auction to be held in a five-star hotel for sale of jewelleries and rough diamond stones which it gave additional prominence in the advertisement, it is difficult to imagine that by the word “description” in the Notice to Bidders the auctioneer was telling the bidders that the liability for misdescription which Equipnet sought to exclude went that far as to exclude liability for misdescription as to the nature of goods put up for auction. A reasonable reader reading the Notice to Bidders under such factual matrix would understand the word “description” to mean description as to quality and quantity only. He would consider if by that word the auctioneers meant what they described as “rough diamond stones” would or could be fake, it would make a nonsense of an auction for jewellery and rough diamond. I am not saying that such exclusion as to the nature of the goods is impossible. It could be done, but clear language is needed, for example, with the use of the word “genuineness” or similar words. But on the other hand, Equipnet also pledged its credibility by saying that it “has used its reasonable endeavors to ensure that the description of each lot(s) appearing in this catalog are accurate”, though it added the rider that “buyers are recommended to rely upon such description at its own risk”. There is also the specific mention of “illustrations, pictures or weight” which Equipnet says may not be accurate. On the other hand, in clause 11(a) of the Conditions of Sale, there was an express reference to representation as to attribution and genuineness. All these clear language excluding liability for misdescription as to quality buttresses the reasonable reader’s understanding that by no reading of the Notice to Bidders was Equipnet seeking to exclude liability for misdescription as to the nature of goods. Thus, reading the document as a whole, a reasonable reader would come to the conclusion that if the auctioneer had wished to exclude liability for false description as to nature of the goods, it would have used unambiguous language such as “attribution” and “genuineness” as it did in the Conditions of Sale, but such words were not used in the Notice to Bidders; and hence the word “description” here means description as to appearance or quality only. 67.Another objective way to construe paragraph 6 of the Notice to Bidders is this. There were two types of descriptions in respect of the Stones, one as to quality (by which I include description as to quantity as well in this context) and one as to its nature. The auction was advertised as a sale of jewellery items and rough diamond stones which was given some prominence. For a prestigious auction of this kind, albeit by liquidators, for sale of jewellery items of an international jewellery business with a reserved price comparable to that of genuine items, it flouts business commonsense for the auctioneer to say by the word “description” he meant to exclude liability for description as to nature of the jewellery items. Such an exclusion of liability goes to the root of the express purpose of an auction of jewelleries of an international jewellery business. To have that effect under those circumstances, unambiguous language is needed, such as the word “genuineness” as it had used in the Conditions of Sale. Exclusion of description as to quality makes good business commonsense but exclusion of description as to nature of goods flouts business common sense. As Lord Diplock said in Antaios Compania Naviera SA v Salen Rederierna AB[9]:
68.Under these circumstances, I find that a fair reading of the third sentence of paragraph 6 would convey to a reasonable reader the meaning that Equipnet had exercised reasonable care to ensure that the description of the quality and quantity of each lot(s) appearing in the catalogue is accurate but nevertheless warned the potential bidders that they should rely on their own judgment. It was not a warning that the nature of the goods was not what they were described. Paragraph 6 of the Notice to Bidders does not have the effect of excluding liability for misdescription as to the nature of the goods. It is not sufficient to exclude liability as to misdescription of the stones as “rough diamond stones”. In that construction but not otherwise, the Notice to Bidders meets the reasonableness test. Clause 4(a) of the Conditions of Sale 69.Clause 4(a) provides:
70.This clause excludes liability for inaccuracy in the videotape presentation. Bidders were deemed to have inspected the goods and had notice of their conditions. This part of the clause therefore excluded liability for breach of warranty or for misdescription as to the quality of the Stones which is not an issue in dispute. It also excluded liability if the goods shown in the presentation were not the goods auctioned and purchased. Nothing actually turned on this clause. 71.A successful bidder was also deemed under this clause to have inspected the goods purchased and was deemed to have notice of their conditions. The word “condition” suggests that the clause applied to notice as to quality and not notice as to the nature of the goods purchased. It is also irrelevant to the present claim. 72.However, it should also be noted that on the fact the inspection arrangement was such that there was no actual inspection in the sense of examination of the goods available to the Plaintiff, unless an appointment to inspect the goods had been made on an occasion before the day of auction. The advertisements and the Notice to Bidders were ambiguous. They informed potential bidders to make appointment for previewing before the auction and previewing would be available between 10:30 am and 1:30 pm on the date of the auction. A reasonable interpretation of these statements read together is that an appointment should be made before the time of the auction and inspection would be conducted during the previewing session. There was nothing to suggest that such appointments for inspection must be made to take place not just before the previewing session but before the day of the auction. When the Plaintiff presented himself at the previewing session and requested for inspection, his request was refused. According to Yau, an interested potential bidder had to make an appointment for inspection before the date of the auction and he would be allowed opportunity to inspect at the office of Equipnet and a couple of bidders had so inspected. But none of them made successful bids. Only the Plaintiff who had not had the opportunity to inspect made successful bids. 73.Given the ambiguous and misleading nature of the advertisement as regards inspection and the lack of opportunity to inspect, the deeming provision was manifestly unreasonable. This provision could not pass the reasonableness test and has to be struck out. But whether this provision is struck out would have no significance insofar as this exclusion was concerned as it is only related to misdescription as to quality and not as to nature of the goods. But, this striking out would remove the clause altogether and fully protect the bidder if the word “description” were to be construed to include description as to the nature of the goods. Thus, in all events, this clause would not have the effect of excluding liability for misdescription as to nature of the Stones. Clause 7(a) of the Conditions of Sale 74.This clause provides:
75.This clause provides that the successful bidder assumes the risk in and relating to the goods purchased upon the fall of the hammer. The effect of this clause is that risk passes with passing of property notwithstanding that possession has not passed. It is not an unusual provision. Nothing turned on this clause. This clause also meets the reasonableness test. Clause 11(a) of the Conditions of Sale 76.This is the only clause which excludes liability for misdescription as to the nature of the goods described in the catalogue. It uses unambiguous language that representation as to genuineness of the goods is only a statement of opinion and excludes liability for incorrectness of such statement. The true and proper construction of this clause is at the heart of this action. This clause provides:
77.Schedule 2 of the Control of Exemption Clauses Ordinance sets out five factors which the court shall have regard, if they appear to be relevant, in applying the reasonableness test. These are:
Apart from these factors, the court may also take into account any factor which it considers relevant. The above list is not exhaustive. Mr Wong advances arguments based on factors (a), (b) and (c) and some other factors outside Schedule 2. 78.On factor (a), Mr Wong argues that the parties were of unequal bargaining strength. Equipnet invited bidders to the auction, decided the rule of the auction, set out the Conditions of Sale, had conduct of the previewing, and of the auction. The Plaintiff could only participate in the auction in accordance with the rules set by Equipnet. He had absolutely no bargaining power, except a negative power of not to bid. This was not a consumer sale. The Plaintiff is a dealer in jewelleries. It was not a sale of essential goods or services. The Plaintiff was free to bid or not to. He could obtain his supplies for rough diamond stones from other sources, though bidding at an auction presented itself as an attractive option. Equipnet was clearly in a relatively stronger bargaining position than the Plaintiff, but in the circumstances of this case I do not consider this a factor of much significance. 79.On factor (b), Mr Wong relies on the attraction given to rough diamond stones in the advertisements and the fact that the auction was conducted by a reputable auctioneer under a court order as inducements. With respect, the inducements referred to in Schedule 2 means collateral benefits which induces a party to enter into a contract, such as favourable payment terms or grant of licences etc. There was none in the present case. The inducements suggested by Mr Wong are irrelevant. 80.On factor (c), Mr Wong argues that the Plaintiff had no knowledge of the terms excluding liability if the Stones were fake. However, the test is not just whether the reader was aware of the term. There is an objective limb to the test as well. The test is whether the contracting party knew or ought reasonably to have known of the existence of the term. 81.This clause has the effect of excluding the vendor’s liability for breach of warranty or misrepresentation. Since the House of Lord’s decision in Suisse Atlantique Societe d’Armement Maritime SA v NV Rotterdamsche Kolen Centrale[10], it is no longer the law that an exclusion clause could not exclude liability for fundamental breach or breach of fundamental term of a contract. However, as such a clause negates the underlying purpose of the contract, it could only be given effect if adequate notice of this term has been given. The more serious is the consequence of the clause, the greater the notice must be given of it. As Lord Denning LJ (as he then was) said in J Spurling Ltd v Bradshaw[11]:
In the context of a contract for sale of jewellery items, a clause which has the effect of excluding liability if the item turns out to be fake goes to the heart of the contract. It is a very important clause. It must be given great notice, for example, by use of large lettering, bold prints, or red lettering. This does not mean all such clauses must be printed in bold prints etc. Whether notice is adequate is all a matter of impression and the surrounding circumstances. It is a question of fact. 82.On the fact, Equipnet advertised heavily on the Chinese newspapers. It placed advertisements in five leading Chinese newspapers between 16 and 23 November 2010, but only twice in one English newspaper on 16 and 22 November 2010. It must have been Equipnet’s intention to target Chinese readers more than English readers. However, the catalogue, the Notice to Bidders and the Conditions of Sale were all in English. The auctioneer also spoke in English. He asked whether any of the potential bidders had difficulties in understanding the language used by him. The Plaintiff did not respond. Yau then asked in Chinese if any of the potential bidders required Chinese translation. Again, the Plaintiff did not respond. The auctioneer then went through the main terms of the Conditions of Sale in English. There was no translation of the same in Chinese. In his admirable honesty, Yau confirmed that the auctioneer had not made any reference to the risk that the items may not be genuine or that potential bidders would be required to assume such risk. This is essentially the liability which clause 11(a) sought to exclude, and which the Defendant now seeks to resort to. The Plaintiff had some knowledge of the English language. He went to an auction conducted in English and received documents in the English language. He did not request for translation. Even if he did not fully understand the Notice to Bidders and the Conditions of Sale, he must be bound by the terms in those documents and bid at his own risk. Though the use of English in the conduct of the auction and in the auction documents is biased, that, by itself, may not be fatal to the Defendant’s reliance on clause 11(a). But the fact remains that the Plaintiff did not fully understand the Conditions of Sale, the auction was conducted in English and he had not been alerted to this particular clause whether in English or in Chinese. That is something which weighs heavily against the Defendant in the reasonableness test. 83.The Conditions of Sale containing this clause was printed on an A-4 size paper. There were seventeen clauses altogether printed in font size of between 4.5 and 5.0. The words were barely readable. At trial, Mr Sheppard produced an A-3 size copy, which is only “less unreadable”. For demonstration purpose, I reproduce hereunder clauses 4(a) and 11(a) which resemble as closely to what they appear in original document as the Words programme could make it:
The above reproduction is actually more readable than the original text because of better spacing and, perhaps, laser jet printing. These clauses are, as I say, barely readable. Not only that, clause 11(a) in very small prints was hidden in an A-4 page full of small prints. The word “genuineness” which is the single most important word in this clause appeared only once in this entire document full of small prints. That word or the clause did not stand out. The tree was just lost in the woods. 84.In considering factor (c), I take into account the following factors. The auction was a heavily English biased auction in that it was conducted in English and the auction documents were all in English, but it was targeted at Chinese audience. The potential bidders were given about five minutes to read all the auction documents, namely the catalogue, the Notice to Bidders and the Conditions of Sale, though they could have read them beforehand had they been given the documents earlier. The English bias was partially cured by the auctioneer drawing the audience’s attention to the existence of some the exclusion clauses and with Yau’s offer of translation. However, the effort was not sufficient. This clause has very serious consequence of excluding liability for misdescription of the nature of the subject matter which goes to the heart of the contract. The auctioneer has to give adequate notice of this clause if it is to be given effect. However, on the Defendant’s own evidence, the auctioneer had not drawn the audience’s attention to this particular clause. As I have demonstrated, the Conditions of Sale containing this exclusion clause is barely readable. The surrounding circumstances in an auction room did not make it any easier to read. The letters were not only very small but were many. The circumstances just discouraged reading. The word “genuineness” was the tree lost in the woods. On the other hand, I also bear in mind that exclusion clauses are to be expected in auctions of this nature, particularly one of sale by liquidators. But an exclusion clause which goes to the root of the contract is rare and requires great notice to be given of its existence. The other circumstances are that this was an auction conducted by a reputable auctioneer in a five-star hotel for sale of jewelleries of an international jewellery business well known for its quality products. A clause of such effect would not have been anticipated in an auction of this class. In conclusion, I find that the Plaintiff did not know and ought not reasonably have known of the existence of this exclusion clause. For the above reasons, I find this clause does not meet the reasonableness test. 85.I understand that the auction documents had been carefully considered by the Liquidators and their solicitors who are all reputable and experienced experts in their respective profession. I believe similar documents must have been used in other auctions and had not been criticised. My finding here is one based on its own facts and surrounding circumstances. My conclusion is not based on the small print alone or the lack of Chinese translation or interpretation alone, but on the totality of all the factors and circumstances I referred to in the above paragraph. In fact, lack of translation or interpretation was not a factor which I have given much weight. Had, for example, the auctioneer told the audience in simple words to the effect that there was no warranty as to genuineness of the items to be sold, or had he invited the audience to read clause 11(a), it would have had the effect of Lord Denning’s red hand. Clause 11(b) of the Conditions of Sale 86.Clause 11(b) provides as follows:
87.This clause excludes liability for inaccuracies or errors of description of any item. Given the meaning of the word “description” as I have found earlier, this clause only excludes liability for description as to quality and not as to the nature of the subject matter of the contract. It is not relevant. Even if the word “description” includes description as to the nature of the subject matter, this clause would still fail the reasonableness test due to inadequate notice as in the case of clause 11(a). Clause 11(c) of the Conditions of Sale 88.Clause 11(c) provides as follows:
89.The term “ “as they lie” with all faults and imperfections” has the same meaning as the term “as is, where is, with all faults” which I have construed above. Accordingly, this clause excludes liability for warranty as to quality only but not misdescription as to the nature of the subject matter of the contract. It is not relevant. Clause 11(d) of the Conditions of Sale 90.Clause 11(d) provides as follows:
91.This clause is expressly about conditions of the goods. “Misdescription” in that context must mean misdescription as to conditions or quality of the goods. Liability for such misdescription is not in issue. 92.Furthermore, for the same reasons as given in my consideration of clause 4(a) of the Conditions of Sale (see paragraphs 66-70 above), this entire clause has to be struck out for failing to meet the reasonableness test due to lack of opportunity to inspect. Conclusion 93.For the above reasons, the terms in all the exclusion clauses relied on by the Defendant, insofar as they purport to exclude liability for express or implied warranty or for misrepresentation that the Stones were rough diamond stones, do not meet the reasonableness test. The terms insofar as they purport to exclude liability arising from deemed inspection also do not meet the reasonableness test because of the actual lack of opportunity to inspect. These terms are therefore struck out and have no effect. The exclusion clauses relied on by the Defendant did not have the effect of excluding liability for misdescription as to the nature of the Stones. 94.On the true construction of the contract, I find this is not a case of sales of goods by description. The Plaintiff went to bid for rough diamond stones in response to the advertisement. Each of the stones was described separately in the catalogue as “rough diamond stone” with an item number and statement of its approximate weight. Under the Conditions of Sale, the stones were sold “as is, where is, with all faults”. Apart from the description of “rough diamond stone” and the approximate weight, there was no other description whether as to quality or any other attribute. The Plaintiff was not bidding for stones of any particular description. He was not bidding for the stones as one lot, but individual stone by stone. It is clear that he was not buying generic goods of a particular description, but the particular stone he was bidding each time. As was held by Nourse LJ in Harlingdon & Leinster Enterprises Ltd v Christopher Hull Fine Art Ltd[12]:
In my view, the sale in question is not a sale by description but sale of specific goods displayed at the auction, identified with an item number and described as rough diamond stone. It was a sale of specific goods. Though not a case of sale by description, it is a term of the contract that the Stones sold are rough diamond stones on “as is” condition. As the Stones delivered were not rough diamond stones, this is a case of non-fulfilment or total failure of consideration. Under this head of claim the Plaintiff is entitled to the payment in court and the Defendant is not. DECEIT Introduction 95.This claim is made as a fall back if the pre-contract representations as to quality of the goods sold did not form the part of the terms of the contract. There is no dispute as a matter of law that to succeed in a claim for deceit, the Plaintiff has to prove that:
96.The Plaintiff relies on representations made to him in the advertisements, catalogue, videotape presentation before auction commenced and a repetition of the representations in the Buyer Invoice. The Defendant does not dispute that the representations were false. It denies that the representations made by Equipnet were imputed to the Defendant. It also denies knowledge that the Stones were not genuine. The Defendant’s defence to the contract claim that the representations did not form part of the contract for sale has no bearing to a claim based on deceit. Whether Equipnet’s representations were imputed to the Defendant 97.The Defendant pleads in paragraph 21 of its defence that insofar as the matters pleaded against Equipnet are intended to fix upon the Defendant, they are denied. This is a remarkable defence to plead. On its own case, Middleton signed the Auction Agreement with Equipnet and employed Equipnet to conduct the auction to sell the jewellery items for the Defendant. While Middleton said he had nothing to do with the preparation of the catalogue, the heading of the catalogue reads, “By order of the Joint & Several Liquidators of Dianoor International Limited (In Liquidation)”. His evidence and Mr Sheppard’s arguments are premised on the sale being a sale by liquidators. Now, the Liquidators come to court to claim the purchase price for the Stones paid into court by Equipnet sold pursuant to the Auction Agreement. Equipnet was clearly the Defendant’s agent for the sale. Under clause 2 of Auction Agreement, the Defendant agreed that Equipnet shall use the Defendant’s name in advertising the auction. What Equipnet did pursuant to the Auction Agreement were acts authorised by the Defendant and attributable to the Defendant and for which the Defendant is liable. How could the Defendant turn around and deny that the representations contained in the advertisement, catalogue and videotape presentation were not to be imputed to it? I shall treat all that Equipnet did in relation to the auction as the act of the Defendant and with its knowledge and consent. The representations made by Equipnet were for all intents and purposes representations made by the Defendant. The representations 98.There could be no dispute that Equipnet put up the various advertisements as agent of the Defendant inviting the public to bid for jewelleries and “eight rough diamond stones of a total weight of 70.59 carat” at an auction on 24 November 2010. The relevant parts of the advertisements are reproduced in paragraph 23. 99.It can hardly be disputed that on a fair reading of the entire advertisement, though only part of it is reproduced above, the representations were clearly that there would be eight pieces of rough diamond stones for auction and that those stones would be available for inspection by appointment between 10:30 am and 1:30 pm on 24 November 2010, ie the day of the auction. The term “rough diamond stones” was further defined in parenthesis in the Chinese advertisements as meaning un-cut or unprocessed natural diamond stones, ie genuine rough diamond stones as understood in the jewellery trade or business. In my opinion, the advertisements contain unqualified representations that eight rough diamond stones would be put on auction on 24 November 2010 with previewing available between 10:30 am and 1:30 pm on that day. 100.The Plaintiff was given a copy of the catalogue upon registration at the auction. The relevant part of the catalogue reads:
The Plaintiff relied on the representations contained in the catalogue in which each of the eight stones was described as “1 x Rough Diamond Stone” with a statement of its approximate weight in carat. 101.Mr Sheppard argues that the heading makes it clear that the auction was a sale by liquidators. He submits, by reference to Stewart v Engel & Another[13], that such a sale is in fact a sale by the company, which by reason of its insolvency and impending dissolution, will offer no redress in the event of the contract being broken leading to loss. Be that as it may, that heading does not detract from the representation that the eight stones put on auction were rough diamond stones. 102.Before the auction commenced, there was a videotape presentation of the various items of jewelleries for auction. The eight stones were described as “rough diamond stones”. These representations are also relied on by the Plaintiff. I cannot see why they were not representations. 103.After the auction, the Plaintiff was given a Buyer Invoice to make payment for the Stones he successfully bid. The Buyer Invoice also described the Stones as rough diamond stones together with their respective approximate weight. The Plaintiff also relies on the Buyer Invoice as a repetition of the representation. Mr Wong argues that it is clearly stated on the Buyer Invoice that the Plaintiff was asked to pay for rough diamond stones and which the Plaintiff did pay. With respect, the contract was made on the fall of the hammer. The representations in the Buyer Invoice, even if they were representations, were made after the contract was concluded and could not have induced the Plaintiff into entering into the contract. They were descriptions for the purpose of identification only. I shall not take the representations contained in the Buyer Invoice into account. The misrepresentation and inducement 104.I am satisfied that Equipnet represented in the advertisements that eight rough diamond stones would be put on auction and represented in the catalogue distributed to the Plaintiff and potential bidders that the eight stones to be auctioned were rough diamond stones. I am also satisfied that in the videotape presentation delivered immediately before the auction, Equipnet again represented that the eight stones to be auctioned were rough diamond stones. There could be no dispute that these representations were false. 105.The Plaintiff’s evidence is that he was induced to bid for the stones by these misrepresentations. Mr Sheppard disputes the Plaintiff’s evidence. He argues that the Plaintiff is a dealer in jewellery and gem and had examined the stones before the auction together with Lui and Lo who are also experienced jewellery traders. He submits that the Plaintiff was relying on his own skill, experience, expertise and judgment in making the purchases rather than on the representations. 106.Having heard the evidence and seen the Plaintiff in the witness box, I am satisfied that the Plaintiff is only an operator of a small jewellery business under the mentorship of his Uncle. He has no formal training in gemmology. He is young and inexperienced. He brought along with him the diamond testing pen for the purpose of testing the stones to verify their genuineness. Despite he presented himself during the previewing session as stated in the advertisement and requested to examine the stones, his request was refused. He had no opportunity of inspection. The stones were kept inside double layer plastic bags which rendered any reliable visual examination impossible. He could not have relied on his skill and expertise or those of his Uncle’s, Lui’s and Lo’s. It is also worthy to note that though the auctioneer cautioned the potential bidders during the videotape presentation that the sale was on an “as is, where is, with all faults” basis, Yau confirmed that there was no warning given that there was a risk that any of the items were not genuine or that the stones were not genuine rough diamond stones. I accept the Plaintiff’s evidence that he was induced by the representations in the advertisement, catalogue and video presentation to bid for the stones. Having rejected Mr Sheppard’s argument that the Plaintiff has not paid or repaid whoever paid the purchase price for him, I find that the Plaintiff suffered loss as result of acting on the misrepresentation. The only outstanding issue is whether the Defendant knew that the representations were false. The Defendant’s knowledge of falsity of the representations 107.I have indicated earlier that by characterising this sale as a sale by liquidators, Mr Sheppard has missed the real issues in this action. He cannot, on the one hand, argue that the contract was one made with the Defendant, but on the other hand, seek to excuse the Defendant from liability on the basis that the Liquidators had no knowledge of the nature of the Stones. As he rightly accepts, it is the Defendant and not the Liquidators which was the contracting party, the inescapable consequence, insofar as knowledge of the falsity of the representations is concerned, is that it is the knowledge of the principal, ie the Defendant, and not its agent, the Liquidators, that is relevant. Otherwise, a principal with knowledge of falsity of certain material facts relating to a contract can cause, allow or standby and watch his innocent agent make false misrepresentations and benefit therefrom without attracting any liability. 108.Nor do I think the fact that the Defendant was placed in liquidation makes any difference. The company in liquidation is the same company. When the liquidator steps into the shoes of the company in liquidation, he takes into possession the knowledge of the company, whether he actually knows of it or not. The company’s knowledge must be imputed to its liquidator. Thus, even if it is the liquidator’s knowledge that counts in a sale by a company in liquidation, the liquidator has constructive knowledge of what the company knows. A company in liquidation cannot hide behind the liquidator’s lack of knowledge and escape liability in any matter where knowledge is a material element to liability. Thus, in a claim for deceit, it is the knowledge of the company, ie the Defendant in this case and not the knowledge of the Liquidators that is relevant. 109.No evidence was given by the Liquidators as to the Defendant’s lack of knowledge of the nature of the Stones. If there was any reason why the Defendant could not have known, for example because of acts of a third party or a fraudulent staff, this court has not been told. I have to approach the question of the Defendant’s knowledge by inference. The Defendant was a reputable international dealer in quality jewellery items. The Stones were kept in its vault. The vault was only accessible to four top managers of the Defendant who together were its only controlling mind. The Stones must have been kept there by them or one of them for some purpose. Through this controlling mind, the Defendant could not have no knowledge of the presence of the Stones inside its vault, what they were and were not. In the absence of evidence to the contrary, it is impossible to argue that the Defendant did not know what the Stones were or could have held any honest belief that the Stones were genuine rough diamond stones. On the above facts, it is open to the court to draw as the only reasonable inference that the Defendant knew that the Stones were not rough diamond stones. 110.Furthermore, knowledge is something exclusively known to the party allegedly claiming or disclaiming that knowledge. However, no explanation has been given by the Liquidators as to why no evidence on the Defendant’s lack of knowledge was given. It is easy for the Liquidators to argue that their duties are to realise the assets to pay creditors and not to run the company or look for the knowledge or belief of the Defendant as to the nature of the Stones. The Liquidators or through them the Defendant has to live with the consequence of not testifying or not offering explanation for not doing so when the circumstances were such that it would be reasonably expected that it would testify as to its lack of knowledge or to give an explanation for not testifying. 111.While KPMG was able to identify from the Defendant’s books and stock inventory the entries relating to the various other items of jewelleries found in the vault, it was unable to find any entry referable to the eight stones. Despite that, no enquiries had been made from any of the four top managers or staff of the Defendant as to what the eight stones were. One of the four managers, Ziaudeen, was largely responsible for the day to day operation of the Defendant. He is resident in Hong Kong and has been responsive to the Liquidators. He also attended the auction. According to Middleton, during the Liquidators’ prior appointment as receivers, KPMG had communicated with Ziaudeen to inform him of the auction and gave him an opportunity to identify and substantiate any claim for ownership of the jewelleries found in the vault, which Ziaudeen did in relation to some of the items. Ziaudeen must be able to give useful information about the eight stones. But KPMG made no enquiry from him about the stones as to what they were and where they were referred to in the stock inventory and their value. After this action has commenced, when knowledge as to the nature of the Stones has become an issue, still no enquiries were made from Ziaudeen and no attempt was made to call him to testify as to the Defendant’s lack of knowledge of the nature of the Stones. Ziaudeen must be able to give useful and material information about the Defendant’s knowledge or lack of knowledge of the nature of the Stones. There is nothing to suggest that he was not available to testify and no explanation was tendered. It can reasonably be expected that he would be called to testify, but he was not. Under such circumstances, it is open to the court to draw adverse inference against the Defendant that Ziaudeen’s evidence would be detrimental to the Defendant’s case of lack of knowledge and the Defendant has something to hide by not calling him. The Liquidators’ failure to call evidence as to the Defendant’s lack of knowledge of the nature of the Stones coupled with their failure to give explanation strengthens the inference enable me to draw the inference that the Defendant knew the Stones were not rough diamond stones. 112.Having reached this conclusion, there is no need to make further finding as to the Defendant’s recklessness and negligence. Actual knowledge excludes recklessness and recklessness includes negligence. The Liquidators’ knowledge and recklessness 113.My finding that the Defendant had actual knowledge that the Stones were not rough diamond stones would have been sufficient to dispose of this action. However, somehow the parties’ arguments are focussed on the question of the Liquidators’ or Equipnet’s knowledge or recklessness or negligence. I have no difficulties in accepting that the Liquidators and Equipnet had no actual knowledge that the Stones were not rough diamond stones. But, their lack of knowledge cannot be imputed to the Defendant who had, albeit by inference, actual knowledge of the falsity of the representations. Besides, as I have explained, the action is against the Defendant and not the Liquidators. The Liquidators’ knowledge is totally irrelevant. For reasons as already explained, the Liquidators must also be taken to have constructive knowledge that the Stones were not rough diamond stones. On the other hand, the Liquidators’ recklessness or negligence can be imputed to the Defendant, even if the Defendant had no knowledge of the falsity. Just in case that my reliance on the Defendant’s knowledge of falsity of the representation and the Liquidators’ constructive knowledge is somehow misplaced, I make the following further finding in respect of the Liquidators’ recklessness and negligence. 114.Mr Sheppard submits by referring to MFI Warehouses Ltd v Nattrass[14] that recklessness implies a total irresponsibility and a total lack of consideration as to whether a statement was true or false. In that case, Widgery CJ concluded that a party can be found to have acted recklessly if it:
I accept this as the correct test for recklessness and shall examine the Liquidators’ conduct against this test. 115.The Plaintiff’s case of recklessness is rather obscurely pleaded. He alleges in paragraph 13 of the statement of claim that despite the Liquidators’ admitted lack of expertise and the absence of document to support the belief that the stones were rough diamond stones, the Liquidators made the representations not caring whether they were true or false. In paragraph 14, he alleges that despite their admitted need to rely upon the expertise of those who assisted them to set reserved price for each and every item of goods (presumably meaning Equipnet), the Defendant was reckless in not bothering to assure itself as to whether the representations were genuine. In paragraph 15, the Plaintiff alleges that in preparing the brochure and the Buyer Invoice, Equipnet was reckless in not caring whether the representations were true or false. In essence, the Plaintiff is alleging that despite their admitted lack of expertise and the absence of documentation to support their belief that the Stones were rough diamond stones, the Liquidators were reckless in permitting Equipnet to make the representations in the advertisements, catalogue and videotape presentation without first making adequate enquiries or calling for expert reports as to the authenticity of the Stones and their value. 116.Middleton said as Liquidators their role was to sell the assets of the Defendant to pay the creditors. He said that not being experts in the jewellery and gems business, he took great care to ensure that the auction sale agreement stated clearly that the items to be sold at the auction were to be sold on an “as is, where is, with all faults” basis at the buyer’s risk. He also ensured that the Defendant through the Liquidators, gave no representations or warranties as to the authenticity of the items to be auctioned. He was satisfied that the auction sale agreement did not contain any such representation or warranty and would not have proceeded otherwise. He said that all potential bidders would be apprised, notified and alerted to the fact that all items being sold at the auction including the Stones should be inspected and that neither Equipnet nor the Defendant could accept any responsibility for any inaccuracies or errors contained in the catalogue. He rigorously denied that the Liquidators had been reckless and argued that they had exercised reasonable care. He relied on the expert opinion of Wong of Chow Tai Fook and the fact that on other previous occasions when the Defendant’s jewelleries were sold there was nothing to suggest that the Defendant was dealing in any jewellery which was other than genuine. 117.Except for one crucial issue, I have no difficulties accepting Middleton’s evidence. He is an experienced liquidator. He had the advice of a reputable firm of solicitors in drafting the necessary documents. Simply put, his evidence is that he has prepared “fail-safe” documentation, including the use of extensive exclusion clauses, to exclude all warranties as to authenticity and quality of the item to be sold. In my view, such care was taken more to protect himself and the Defendant than for informing the potential bidders of their risk that the representations as to what the goods were may be false. On the crucial issue, I find, contrary to Middleton’s evidence, that the Liquidators had done nothing or nothing adequate to ensure no representations or warranties as to the authenticity of the items to be auctioned was given. The Liquidators simply assumed the eight stones were diamond stones and allowed their staff to inform Equipnet of the same and that representation, albeit modified by Equipnet, was then passed onto the Plaintiff and other potential bidders. Hereunder is my analysis of Middleton’s evidence leading to the above finding of fact. 118.The Liquidators had control over the Defendant when they were appointed as receivers on 25 April 2008. They were then appointed as Liquidators on 9 July 2010. However, those events which occurred since 25 April 2008 through to 9 July 2010 do not cease to be within their knowledge and are relevant to the issue as to their recklessness. On 2 May 2008, the Liquidators, as receivers, gained access to the Defendant’s vault in the presence of Mr Laracy, an independent solicitor. Their staff compiled an inventory of all the items found inside the vault, including the eight stones. 119.The Liquidators admittedly are not experts in jewellery and did not know what the eight stones really were. To my untrained eyes, the stones appeared like plastic and not anything appealing. However, the Liquidators permitted their staff to label those stones as “diamond stones”. That is understandable as provisional labelling on the assumption that anything found inside the vault of a reputable jewellery business must be jewellery of some value and that to a stranger to the trade there is no difference in nomenclature between diamond stones and rough diamond stones. 120.However, as events unfold, the circumstances cried out for enquiries to be made of the stones. The Defendant’s computer became accessible. While KPMG was able to identify from the Defendant’s books and stock inventory the entries relating to the various other items of jewelleries found in the vault, there were no entries referable to the eight stones. Middleton advanced the following theory to explain why the eight stones were not accounted for. He said that the Liquidators were appointed as receivers on 25 April 2008 and there was period of 25 days after the ‘run day’ of the ‘statement of stock figures’ dated 31 March 2008. He suggested that the stones might have only been received by the Defendant after 31 March 2008 and were therefore unaccounted for. On this theory, there is no reason why he could not have examined the books and records thereafter. The failure to account for these eight stones in the books and inventory of the Defendant should, at least, raise some concerns what those eight stones were. Even if that was a possible explanation, it was too bold an assumption to make without making some very simple enquiries which were appropriate and possible in the circumstances, especially given the value the Liquidators attached to the eight stones on the assumption that they were genuine (see paragraph 130 below). 121.During cross-examination, Middleton explained why he assumed the stones were diamond stones by placing reliance on Mr Laracy’s statement in paragraph 23 of his affidavit in which he said:
Middleton assumed that this item constituted the collection of eight stones. Mr Sheppard submits this must be so on a balance of probabilities. However, like himself, Mr Laracy did not profess to be an expert in jewelleries. He only attended as an independent solicitor witnessing the opening of the vault and stock taking. If Middleton were to rely on Mr Laracy’s statement that the stones were diamond stones, he was just making assumptions. He must be grossly negligent, if not reckless. 122.Next, Middleton said he placed reliance on Wong’s so called “expert opinion” and “valuation”. In a gratuitous opinion, Wong gave an oral valuation of $7 million for all the items. He followed up with a letter dated 6 May 2008 confirming his oral opinion as follows:
As Middleton’s evidence and this letter show, the survey was a very rough estimate of the global value of all the items. That survey was a gratuitous one invited at the initiative of one of KPMG’s staff whose identity Middleton could not even recall. It was done on a friendly or casual basis because of the relationship between that staff and Wong. There was no breakdown of the valuation for each individual item. It contained no representation as to what the items were and certainly no representation that the eight stones were rough diamond stones. I think the valuation is no more than what was in the best opinion of the maker that jewellery items were worth on the assumption that they were genuine jewellery items or gems. There was no express opinion that they were genuine jewellery items or gems. 123.With respect to Middleton, I do not think any reasonable liquidator would have seriously treated a gratuitous valuation given in such broad terms and obtained on a friendly or casual basis as expert opinion that the items were genuine jewellery items, and specifically for the present purpose that the eight stones were genuine rough diamond stones. Despite his assertion, it would be an insult to his intelligence to assert, careful as he was with his “fail-safe” documentation, that he relied on Wong’s valuation as expert opinion that the stones were genuine. He did not even call Wong to testify that in his expert opinion the eight stones were rough diamond stones. Again, no explanation was given. Adverse inference may be drawn that he knew Wong only gave a valuation on the assumption that the jewellery items were genuine and did not vouch for their authenticity. I do not believe Middleton placed any reliance on that valuation as a representation by an expert that the stones were genuine rough diamond stones. If he did, he was negligent, at least. I do not believe in his evidence. 124.Middleton said he also relied on the absence of any suggestion by Wong that the stones were anything other than genuine gems as his reason for his belief that they were rough diamond stones. His evidence must be dismissed for the same reasons as given in the above paragraph. As the underlying assumption of the valuation was that the jewellery items were genuine, Wong would not have made any comment on the genuineness or otherwise of the items. Middleton is relying on Wong’s silence as another representation by an expert that the stones were genuine is hardly credible. 125.The other reasons for Middleton’s belief that the eight stones were genuine were the outcome of the sales of jewellery items from the Dianoor Group in London and the expert reports on nine other items in Hong Kong and their subsequent sales: see paragraph 18 above. He said the sales suggest that the items sold were genuine jewellery items, and hence there was nothing to suggest that the Defendant dealt in anything other than genuine jewellery items. There were so very many jewellery items from the Dianoor Group in London and from the Defendant in Hong Kong that if a few of them proved to be genuine does not necessarily mean all were genuine. Nothing is known if the items sold in London were referable to any inventory or books of the relevant member of the Dianoor Group. Apparently the ones sold in Hong Kong previously were referable to some inventory or books of the Defendant, not to mention that expert opinion as to their value had been obtained. By contrast, the eight stones were not referable to the books and inventory of the Defendant. In the circumstances, an assumption that they must be genuine is one which was too bold to make. To make that assumption without even making such simple enquiry as the circumstances called for and permitted is reckless. 126.When cross-examined as to why he did not arrange for an expert examination of the stones when he had obtained expert valuation of the other nine items referred to earlier, Middleton’s answer was that at that time he was acting as receiver and had to seek the court’s leave for the sale of those items and a valuation was necessary to support the application for leave, whereas now as Liquidator he was vested with the power to sell without having to seek the court’s leave, and besides the costs of a proper evaluation for all items put on the auction would be too expensive. 127.It appears to be the theme of Middleton’s evidence that as Liquidators, it was their power under section 199(2)(a) of the Companies Ordinance and prerogative to sell the assets of the Defendant to pay creditors and that by knowingly dealing with a company in liquidation the Plaintiff has no remedy. While the court’s leave was not required in a sale by liquidators, their appointment as liquidators was not a licence to sell without exercising care. On the assumption that the eight stones were genuine, they would be of significant worth (see below). Without a valuation, how could the Liquidators or Equipnet have determined a proper reserved price and satisfied themselves that the stones would not be sold at undervalue? How could Middleton have discharged his duty to the Defendant? How could he have satisfied himself that Equipnet’s representation in the Notice to Bidders that it “has used its reasonable endeavors to ensure that the description of each lot(s) appearing in this catalog are accurate”? 128.Middleton explained that it would be too costly to have all the items valued. I dismiss that as a mere excuse. Cost consideration should not have been taken in isolation of the likely value of the items to be sold. Here, Equipnet put a reserved price of $1,130,000 for the eight stones against a total reserved price of $4,062,000 for all the items. On that basis, the eight stones together would be worth more than one quarter of the value of all the items. Five of the stones were each given a reserved price of between $140,000 to $200,000. None of the entire lot of 114 items to be auctioned was given a reserved price within that range. Obviously, these five if not all eight stones were considered to be the most valuable items and the stars of the auction. They certainly deserved to be tested for authenticity and to be properly valued for the reasons given in the above paragraph. If cost was a consideration, at least one of the stones could have been tested and valued. The result would have enabled the Liquidators to know what those stones were and provide the basis for a proper valuation of the reserved price for the other seven. That was not done. I am not being wise with hindsight. It is just simple common sense and prudence. However, the Liquidators chose to leave it to their staff to refer the stones to Equipnet as “diamond stones” and then left it to Equipnet to represent in the advertisement, the catalogue and video presentation that they were rough diamond stones and to fix reserved prices on that basis. Middleton’s attitude was simply that he “couldn’t care less” as liquidators had power to sell and they had adequately protected themselves and the Defendant by carefully drafted documentation and exclusion clauses. 129.When the stones were delivered to Equipnet, almost at once, Yau considered it inappropriate to describe the stones as “diamond stones” and referred them as “rough diamond stones” in the catalogue. There was some inconsistency in the evidence as to who was the author of this new description. Middleton said he was informed by his staff that Wong had said that the stones were “rough diamond stones”, therefore suggesting it was Wong’s expert opinion that they were rough diamond stones and that it was Wong who suggested the change of description. In his witness statement, Yau gave a similar account. However, in his oral evidence in court, Yau denied what he said in the witness statement and adamantly insisted that it was he who took the liberty to change the description when preparing the catalogue, just as he did with many other items. Not only was Middleton’s evidence hearsay, he could not even recall which of his staff informed him of Wong’s advice. On the other hand, Yau’s evidence is direct first hand information. Though he had given an inconsistent account in his witness statement, I am impressed by his sincerity and honesty as a witness and impartiality as a responsible auctioneer and interpleading party. He was in charge of this auction and attended to it throughout. He had his hands on the matter. On the other hand, Middleton had many other matters to attend to. This auction was just one of the incidental matters of his many other responsibilities. Most of his functions were delegated to his staff. He could not even remember who told him about the advice from Wong. I accept Yau’s evidence and reject Middleton’s. This finding also dented Middleton’s credibility. 130.Yau is very experienced in the auction business, though he had no experience in the auction of rough diamond stones. He assumed the stones were rough diamond stones. That must be because KPMG’s staff referred the stones to him as diamond stones. He gave a reserved price of between $80,000 to $200,000 for each of the eight stones and a total reserved price of $1,130,000 for all the eight stones representing over 25% of the total reserved price of all the items. In his admirable honesty, he admitted that Equipnet had a diamond testing pen and he knew about its use in testing diamond stones, but nevertheless decided not to test the stones with the pen. That must also be because he was acting on the Liquidators’ instruction through their staff of KPMG that the stones were diamond stones. While it was reasonable for Equipnet to rely on the information given to him by the Liquidators and their staff, that could not excuse the Liquidators. The reserved prices assessed by Equipnet cried out for a valuation to be made of at least one of the stones and further cried out for enquiries to be made by the Liquidators as to the nature of all the eight stones. 131.I do not accept it was reasonable to make the assumption Middleton made. The Liquidators admitted they had no expertise in jewelleries and had no knowledge of what the stones were. The failure to account for the eight stones in the books of the Defendant calls for enquiries. This is particularly so in view of the value attached to the eight stones on the assumption that they were genuine and the ease with which such enquiries could have been made. The Liquidators could have easily made enquiries from the four top managers who were the only persons given access to the vault or from other members of the staff as to what the stones were. That the Defendant was in liquidation does not mean that none of its staff was available to assist in such enquiry. In particular, one of the four top managers, Ziaudeen, who was largely responsible for the day to day operation of the Defendant, is resident in Hong Kong and has been responsive to the Liquidators. Given his position in the Defendant and his experience in the trade, Ziaudeen must be able to give useful information about the stones as to what they were, where they were referred to in the inventory and books, and their value. Nothing could have been simpler than to ask a few questions of Ziaudeen. But the Liquidators did not. The Liquidators did no more than to ask Ziaudeen to claim back his own jewelleries in the vault. It seems it never occurred to Middleton that he should at least ask Ziaudeen what those stones were and what in his opinion those stones were worth. 132.Instead of making such simple enquiries, the Liquidators simply permitted the stones to continue to be called “diamond stones” and permitted them to be referred to as such in the list of auction items sent to Equipnet. What the Liquidators did was just little short of calling anything found inside the vault or show case or even left on the floor of a jewellery shop which looked like a piece of jewellery or gem a genuine jewellery item. This suggests to me that the Liquidators did not care whether that the eight stones were genuine and conveniently and boldly assumed they were diamond stones or rough diamond stones. They must know that Equipnet will act on their instructions and pass on the representation to potential bidders. Middleton said he had ensured that the Defendant through the Liquidators, gave no representations or warranties as to the authenticity of the items to be auctioned. On the above analysis, what had the Liquidators done? Middleton, regrettably, impressed me as not having given any serious thought to what the stones were. He just left it to his staff to describe them in whatever way the staff thought fit and even described them as diamond stones. He claimed to have relied on a gratuitous expert report prepared by Wong and on Wong’s silence, lack of adverse feedback from other sales by Dianoor Group in London, and the expert report that nine other items were found to be genuine. I reject all such evidence as a convenient concoctions to explain his lack of recklessness or negligence. 133.In summary, although the Liquidators did not have actual knowledge that the stones were not rough diamond stones, the circumstances in which the eight stones were found, the lack of reference to those eight stones in the inventory and books of the Defendant and the value which those eight stones were considered to be worth cried out for enquiries to be made as to their nature and value. Despite the ease with which such enquiries could have been made of Ziaudeen, no enquiries were made. Despite that and their lack of expertise in gemmology, the Liquidators chose not to obtain expert report on what the stones (or at least one of them) were and their value. Their excuse based on costs was a lame one as they could have tested one of the stones. The Liquidators chose not to take any of the above steps which I think any reasonable liquidators would have taken. Instead they chose to proceed on the bold assumption that the stones were rough diamond stones and passed that information to Equipnet which caused Equipnet to make the false representation in the advertisement, catalogue and video presentation. They went far beyond the realm of gross negligence. They were reckless. Thus, even if for some unknown reasons the Defendant did not know the stones were not genuine, which I do not think could be correct, the Defendant was reckless because the Liquidators were. In coming to this conclusion, I have cautioned myself not to make such an adverse finding against a liquidator who is an officer of the court. But the conclusion is so compelling on the evidence. Conclusion 134.For the above reasons, all the four elements necessary to support a claim of deceit is proved against the Defendant, who was the party to the contract. The Plaintiff is entitled to set aside the contract and be returned the purchase price which is now in court. NEGLIGENT MISREPRESENTATION 135.This claim is the Plaintiff’s second fall-back in the event that both the contract claim and deceit claim fail. To succeed in a claim for negligent misrepresentation, the Plaintiff has to prove that he suffered loss as a result of acting on representation made to him by the Defendant which was false. He does not have to prove that the Defendant knew of the falsity of the representation or was reckless. The burden is on the Defendant to prove it was not negligent. 136.As I have found the Defendant had knowledge of falsity of the representation, such finding must necessarily exclude the possibility that the Defendant were reckless. It is only on the assumption that for some unknown reasons the Defendant had no knowledge that the Stones were not genuine, that I embark on this rather artificial analysis. Then, having found the Liquidators were reckless, it excludes the possibility of any finding of lack of negligence as recklessness must include negligence. 137.On the finding of fact in the preceding main section, the Plaintiff has proved the elements required to support a claim for negligent misrepresentation and the Defendant or Liquidators have failed to prove no negligence on their part. The Plaintiff is therefore also entitled to judgment. LOSS AND DAMAGE 138.Mr Sheppard argues that the Plaintiff suffered no loss or damage. That argument is premised on the purchase price being paid by Lo and that the Plaintiff had not repaid Lo. I am surprised that this argument which I have dismissed as frivolous could have been so seriously argued by counsel and meticulously pursued in cross-examination of the Plaintiff and his witnesses. Under the claim in contract as well and in deceit or misrepresentation, the Plaintiff is entitled to be returned the purchase price and premium paid. The purchase price and premium subject to deduction of Equipnet’s costs of the interpleader application of $40,000 was paid into court. The payment now standing in court together with interest should be released to the Plaintiff. He is also entitled to the shortfall in the sum of $40,000 deducted. 139.In addition, in view of the length of time the course of this litigation has taken, the Plaintiff should be awarded pre-judgment interest. Having regard to the current low interest rate environment, I consider interest at the rate of HIBOR for a term of one year plus 2% which I assess to be 2.5% appropriate. The Plaintiff should therefore be awarded pre-judgment interest at the rate of 2.5% per annum on the entire sum of $1,155,000 with credit being given to the interest earned by the payment made into court. 140.The Master has provided for the costs of the interpleader application as between the Plaintiff and the Defendant, ie the Plaintiff shall have costs of the interpleader application against the Defendant. CONCLUSION 141.I repeat my conclusion in paragraphs 94, 111, 133 and 134. The sale in question was not a sale by description but sale of specific goods displayed and identified at the auction with a warranty that they were rough diamond stones. The Stones delivered were not rough diamond stones. This is a case of non-fulfilment or total failure of consideration. Alternatively, if the exclusion clauses were effective, there was no warranty that the Stones were rough diamond stones and there was no total failure of consideration. The Plaintiff is nevertheless entitled to rescind contract which was entered into as result of fraudulent representations having been made to him. In either event, the Plaintiff is entitled to be returned the purchase price, including the premium paid. Thus, he is entitled to be released the payment which Equipnet paid into court together with interest thereon. Upon receipt of that payment, he shall return the Stones to the Defendant. In addition, he is entitled to be paid damages by the Defendant equivalent to the shortfall representing the sum of $40,000, being Equipnet’s costs of the interpleader application which Equipnet had deducted from the purchase price and premium. He is also entitled to pre-judgment interest at the rate of 2.5% per annum on the sum of $1,155,000 from the date of issue of the Originating Summons until payment with credit being given to the interest earned by the payment made into court. In view of the award, there is no need to grant the declaration sought. 142.I am critical not only of the Liquidators’ conduct of the sale but also their conduct of this litigation. First, in their conduct of the sale, they exercised great care to protect themselves and the Defendant from liability for all warranties, which they were entitled to do and should do. However, they did not ensure that the auction was properly carried out and the exclusion clauses adequately brought to the notice of the potential bidders. Second, they and Equipnet did nothing to ensure their pre-contract representations, which they excluded from being incorporated into the contract, were accurate. They were reckless in not caring whether those representations, which attracted potential bidders to the auction, were true or false. They did not warn the potential bidders of the risk that their pre-contract representations might be inaccurate. Effectively, by their recklessness, they lured potential bidders to bid in the auction under terms which they carefully worked out with their solicitors to leave the successful bidders without remedy. 143.As for their conduct this litigation, they rightly adopted the position that this was a liquidator’s sale and the true contracting party was the Defendant. But when it comes to the question of the Defendant’s liability for misrepresentation, they sought to divert the court’s focus to the Liquidators’ lack of knowledge of falsity of the representation instead of the Defendant’s. They also sought to hide the Defendant behind the shield of a liquidator’s sale by arguing that by purchasing from a company in liquidation which by reason of its insolvency and impending dissolution will leave the Plaintiff with no remedy, when the question is to whom the money in court should be released. They put the Plaintiff to strict proof that he was the bidder, purchaser and that he had paid or repaid the purchase price. In their pleading, they even had the audacity to put the Plaintiff to strict proof that the Stones he purchased were fake when they know by their own expert’s analysis of the remaining one in their possession was fake. Though that challenge was eventually abandoned, cross-examination went as far as attacking the integrity of the chain of exhibits relating to the Stones. There was a total lack of good faith in the conduct of their defence. 144.If one sits back and looks at what this case is all about, stripped of the niceties of the law and accusation of deceit or fraudulent intention, it is a simple case where the parties entered into a contract for sale and purchase of what the seller represented were rough diamond stones. An honest and honourable seller would have returned the price and take back the Stones. Instead, the Liquidators are saying, “Wait! Wait! Show me that you have bought the stones from me. Show me that they were fake. Show me that the Stones which you say are fake were the very stones I sold you. And show me that you have paid the price or that you have repaid whoever paid it for you. And by the way, because you bought from a company pending dissolution you have no remedy. I am entitled to retain the purchase price for the benefit of my creditors.” Then when it comes to the question of rescission based on fraudulent or negligent misrepresentation, the Liquidators say, “The Defendant was the party to the contract. But because we, the Liquidators acting for them, have no knowledge of the falsity of the representation, the Defendant could not be liable for deceit.” 145.On the above basis, the Liquidators refused to return the purchase price; and under the pretext of due exercise of their power to sell the Defendant’s assets to pay its creditors forced the Plaintiff to resort to litigation and denied him of the use of the money paid into court. By any view, the Liquidators’ “Robinhood style” of approach and conduct of this litigation is deplorable and unbecoming as officers of the court. The Plaintiff was made to incur unnecessary costs, which may not be fully recoverable. Having regard to the conduct of the Liquidators, I invite the parties to address me on the question of costs, including the scale of costs and whether third parties should be ordered to pay if the Defendant cannot.
Mr Wong Chao-wai Brian, instructed by Messrs Hastings & Co, for the plaintiff Mr Andrew Sheppard, instructed by Messrs Tanner De Witt, for the defendant [1] [2000] BCC 741 at 743E to 744F [2] (1838) 4 M & W 399 at 404 [3] See paragraph 77 post [4] [1998] 1 WLR 897 at 912-913 [5] [1999] 4 HKC 707 at 726-727 [6] 6th edition, at 127 [7] 6th edition, at 656 [8] [1997] A.C. 749 [9] [1985] A.C. 191, 201 [10] [1967] 1 AC 361, [1966] 2 All ER 61 [11] [1956] 2 All ER 121, at 125F [12] [1991] 1 QB 564 at 574G to H [13] [2000] BCC 741, per HH Raymond Jack QC (as he then was) at 745H [14] [1973] 1 WLR 307, per Widgery CJ at 312F and 313G |
Cases cited in this judgment
Further hearings and rulings under HCMP 2483/2011