DOLPHIN ADVERTISING LTD v. TRONKEN ENTERPRISES LTD

HCA2409/2006

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 2409 OF 2006

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BETWEEN

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REASONS   FOR   JUDGMENT

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Introduction

1.  The plaintiff is owned equally by Tam Pak Shan, Samson and Chan Yee Sing. They purchased it as a shelf company in February 2006. Chan Yee Sing was an advertising executive and the plaintiff was acquired to take advantage of a business opportunity that arose in the following circumstances.

2.  In February 2006, Chan Yee Sing was approached by a Mr Chan King Ming, who he understood so he says to be representing the defendant. The defendant owned, so Chan Yee Sing was lead to believe, a LED Television Panel on the exterior wall of Unit 3137 of the Macau Ferry hall and advertising panels on the exterior wall of Unit 3001 of the Macau Ferry hall, which is part of the Shun Tak Centre, which I shall refer to collectively as the “advertising space”.

3.  The defendant is associated with the Greek Mythology Entertainment Group of companies (“Group”), which is engaged in the casino and entertainment business in Macau. Chan Yee Sing says that Chan King Ming told him that the advertising space had been used exclusively for promoting the Group’s business. Chan King Ming was considering allowing 3^rd party advertising in the advertising space to generate revenue. Chan King Ming thought that he needed somebody with experience of the advertising industry to assist him by finding advertisers. He intended that the person finding the advertisers and the defendant would share the profits.

4.  Discussions progressed constructively. As a consequence the plaintiff company was acquired and the plaintiff rented premises at Unit 3092 of the Shun Tak Centre from the defendant. The discussions lead to an agreement of commercial terms as recorded in a letter dated 28 April 2006 from the Greek Mythology Group Entertainment Ltd, of which Chan King Ming was a director until 1 June 2006. It was Li Wing Sze’s (“Ms Li”) unchallenged evidence on behalf of the defendant that Chan King Ming did not turn up for work from the end of April. On 10 May 2006, a licence agreement was signed by the parties (“Licence”). The Licence had been drafted by a firm of solicitors, Cham & Co., who had been instructed by the defendant.

5.  In about early June 2006, Chan Yee Sing began to deal with Ms Li Wing Sze (“Ms Li”) instead of Chan King Ming. Ms Li was the personal assistant to Madam Chen Mei Huan (“Madam Chen”), who was in turn the personal assistant to Mr Ng Man Sun (“Mr Ng”) who was a director of the defendant. It was the unchallenged evidence of both Ms Li and Madam Chen that neither of them knew anything about the Licence or the discussion leading up to its execution until Chan Yee Sing told them. Madam Chen asked Mr Ng if he knew about the Licence. He did not. It transpired that the defendant did not own the LED TV panel. It was owned by the Group. The light boxes were not erected on property owned by the defendant or the Group, but were erected on floor space immediately adjacent to a shop owned by the defendant under an informal licencing arrangement with owners of the Diamond Square common area. The board of the defendant (“the Board”) had not authorised Cham & Co.’s instructions or the making of the Licence. The Board had not authorised and was not aware of the leasing to the plaintiff of Unit 3092. The defendant took view that it was not bound by the Licence and did not want to implement it.

The present proceedings

6.  As a consequence of the defendant’s refusal to comply with the Licence, the plaintiff issued a Writ endorsed with a short Statement of Claim on 1 November 2006. By that time the defendant had made it clear through its solicitors, Gallant Y.T. Ho & Co., that the defendant had not authorised Chan King Ming to make the Licence on the defendant’s behalf. In paragraph 3 of the Statement of Claim the plaintiff pleads that “the defendant by its authorised representative” signed the Licence. There is no plea of apparent authority.

7.  The Defence was filed on 20 December 2006. In paragraph 3 it is denied that the defendant instructed Cham & Co. to prepare the Licence. It is also expressly pleaded that the defendant had not authorised any person to execute the Licence. On 26 May 2009, the Defence was amended to plead in a new paragraph 2B that the LED TV panel belongs to the Group. Other than for particulars of damage dated 12 June 2009, there were no further pleadings at the commencement of the trial.

8.  On 20 December 2009, my clerk wrote to the parties in the following terms:

“  Deputy High Court Judge Harris has directed me to write and inform the parties that he would like the Plaintiff to address fully in its opening (1) the acts relied on as demonstrating that the Chan King Ming had actual authority to enter into the licence on the Defendant’s behalf (2) the acts of the Defendant which it relies on as constituting the Defendant holding out that Chan King Ming had authority to bind the Defendant in the manner alleged (2) the law on this issue.  In considering these issues the Plaintiff should have regard to paragraph j on page 1417 of the judgment of Steyn LJ in First Engery v Hungarian Bank.

The Deputy Judge would also like the Defendant to address these issues in an opening immediately after the Plaintiff’s opening and before any evidence is called.”

9.  The reason this letter was written was that having read the papers and the plaintiff’s Opening, it seemed likely that Chan King Ming did not have actual authority and that so far as liability was concerned, the principal issue would be whether he had apparent or ostensible authority. This was not pleaded and the witness statements filed by the plaintiff touched on matters relevant to this issue very superficially. My preliminary view was that from what I had read in the witness statements and the documents in the hearing bundle the plaintiff had no prospect of success.

10.  The plaintiff was represented at the trial by Mr Kong Kok Lung (“Mr Kong”). Mr Kong accepted during his opening that Chan King Ming did not have actual authority to sign the Licence on the plaintiff’s behalf and that he needed to amend the Statement of Claim to plead that Chan King Ming had apparent authority. Mr Kong sought leave to make the following amendment:

“  Amended Statement of Claim

3A.  The Plaintiff further avers that the Licence was signed by Mr. Chan King Ming (‘CKM’), alias Mr. Michael Chan by virtue of his apparent authority from the Defendant.

Particulars

(a)  In or about February 2006, CKM invited the Plaintiff to negotiate into the terms of the Licence.

(b)  During the negotiations, the Plaintiff submitted draft proposals to a Mr. Cham of the Defendant.

(c)  On 15^th April 2006, a Chinese tenancy agreement signed by Mr. Chan Yee Sing on the part of the Plaintiff and CKM on the part of the Defendant for Unit 3092 on the 3^rd floor of said Shun Tak Centre.

(d)  The Plaintiff paid a rental deposit in the sum of HK$7,500 to the Defendant on 29^th April 2006 regarding the tenancy of Unit 3092.

(e)  The Plaintiff took possession of the said Unit 3092.

(f)  A letter dated 28^th April 2006 signed by CKM on behalf of the Defendant addressed to the Plaintiff agreeing to the proposal of the Plaintiff subject to finalization of the contract to be handled by Cham & Co, solicitors.

3B.  The Plaintiff avers that it has acted on the representations/conducts of the Defendant to enter into the Licence.

Dated the 23^rd day of November 2009

KONG Kok Lung

Counsel for the Plaintiff

Szeto Virginia & Co

Solicitors for the Plaintiff”

11.  Mr Paul Leung who appeared for the defendant did not object to the plaintiff having leave to amend on the following terms:

(i)  There be no further evidence adduced;

(ii)  The defendant has leave to amend its Defence; and

(iii)  The plaintiff pays the defendant’s costs of the action up to the date of the amendment on the grounds that without it the plaintiff’s case would fail.

12.  After hearing counsel on the terms on which leave should be granted, I made the following order:

(i)  The plaintiff has leave to amend its Statement of Claim in the form of the draft handed to the court on 23 November 2009.

(ii)  The defendant has leave to make consequential amendments to its Defence by 9:30 a.m. on 25 November 2009.

(iii)  The plaintiff has leave to file a further witness statement by 9:00 a.m. on 24 November 2009 limited to the matter pleaded in paragraph 3A(b) of the Amended Statement of Claim.

(iv)  The costs of and occasioned by the application to amend the Statement of Claim and the amendments be reserved.

13.  I would note at this point of the judgment that I had expected Mr Leung to object to the amendment. If he had I anticipate that I would have refused leave with the consequence that the action would have become unsustainable. I assume that the plaintiff decided, perhaps astutely, that the better course was to agree to the amendments, as it was understandably confident of having the action dismissed. The plaintiff may have thought this reduced the possibility of an appeal.

14.  I reserved the costs because although sympathetic to the plaintiff’s application that the defendant pays the costs of the Action up to the date of the amendment, a fact of which I informed both counsel, I preferred to deal with costs generally at the end of the trial.

The issues

15.  There is no dispute that Chan Yee Sing and Chan King Ming signed the Licence as the plaintiff contends. The defendant accepts that Chan Yee Sing signed the Licence honestly, albeit the defendant contends mistakenly, believing the plaintiff was making a binding agreement with the defendant.

16.  So far as liability is concerned the issues are:

(i)  Did Chan King Ming have apparent authority to sign the Licence on the defendant’s behalf?

(ii)  Was the defendant able to licence the use of the advertising space and if not what are the consequences?

17.  Both parties filed evidence assessing what loss the plaintiff has suffered if the Licence binds the defendant. I address this later in the judgment.

Apparent authority: legal principles

18.  In Freeman & Lockyer v Buckhurst Park Properties (Mangal) Ltd [1964] 2 QB 480 Lord Diplock explained apparent or ostensible authority as follows:

“… is a legal relationship between the principal and the contractor created by a representation, made by the principal to the contractor, intended to be and in fact acted upon by the contractor, that the agent has authority to enter on behalf of the principal into a contract of a kind within the scope of the ‘apparent’ authority, so as to render the principal liable to perform any obligations imposed upon him by such contract…”

19.  Self-evidently representation by the agent himself that he has authority is not sufficient to create apparent authority. It is necessary that the representation is made by the principal: AG for Ceylon v Silva [1993] AC 461, 479.

20.  In the case of a company the position is a little more complex. A company acts through its directors conducting business in accordance with the company’s articles of association. In practice many people dealing with a company will be unfamiliar with both the relevant legal principles and the articles of association peculiar to a particular company. Companies Law has developed to deal with this practical problem. Turquand’s Rule ((1856) 6 E&B 327) provides that a third party acting in good faith does not have to concern himself with whether a company has complied with its own internal regulations. Similarly, section 5C of the Companies Ordinance, Cap. 32, has done away with constructive notice of matters that a third party could ascertain if he checked publicly available records. None of this, however, alters (as Mr Kong suggested it did) the need for a third party dealing with a person who holds himself out as acting for a company to have as a result of representations made by the company good reason to believe that the person has authority to represent the company and where relevant bind it. Broadly speaking the necessary representation will arise either from a statement made by a duly authorised officer of the company or the company giving the person in question a position that would normally entail him having the authority to make the relevant commitment on behalf of the company.

21.  It follows that in order for the plaintiff to establish that Chan King Ming had apparent authority it will have to prove that a duly authorised officer of the defendant represented that he had authority to negotiate and conclude the license or that he held a position that would normally entail him having such authority and that the plaintiff relied on whichever of them applies.

22.  Although it is understandable that Chan Yee Sing would have assumed that if a firm of solicitors, in this case Cham & Co., held themselves out as representing the defendant everything was in order, the fact alone that the putative agent was acting in conjunction with solicitors apparently representing the alleged principal does not of itself give rise to apparent authority if the solicitors were not in fact instructed by the principal: National Commercial Bank Ltd v Albert Kwang, David Ching & Co. [2002] 408 at paragraphs 39 to 41.

Liability: Discussion and Conclusion

23.  The plaintiff called only 1 witness to give evidence in respect of the liability issue, Chan Yee Sing. Chan Yee Sing made 2 witness statements. In these he explains how he came to sign the Licence. I found Chan Yee Sing to be an honest witness who evidence I accept. His evidence can be summarised as follows. He had had dealings with Chan King Ming for sometime although unconnected with the activities of the defendant or the Greek Mythology Group. Chan King Ming approached him in about February 2006 and explained that he wished the advertising space to be used for businesses other than the Group in order to increase revenue. The intention was that Chan Yee Sing find advertisers and deal with the operational aspects of using the advertising space. Between about February and May 2006 Chan Yee Sing negotiated the terms on which this business would be carried out with Chan Yee King and his secretary a Mr Cham. Business terms were agreed and a licence was drafted by Cham & Co. on instructions from the defendant, or so Chan Yee Sing assumed, although Cham & Co.’s fees of HK$8,200 were paid by the plaintiff, which was incorporated specifically to carry on this business venture. Prior to making the Licence the plaintiff signed a tenancy agreement with the defendant to rent premises at Diamond Square from which to operate the new business.

24.  It was suggested to Chan Yee Sing by Mr Leung that he should have been alerted to the fact that neither Chan King Ming nor Mr Cham were in fact acting for the defendant, or at least not duly authorized to do so, by the fact that a number of the documents that were exchanged between them were headed Greek Mythology and that he should have appreciated that the defendant did not own the LED TV panels or the light boxes. I do not accept this. It seems to me to be perfectly understandable that Chan Yee Sing would have initially assumed that Chan King Ming and Mr Cham were able to negotiate the agreement, which became the Licence and that as it appeared that the defendant had instructed solicitors to draft the Licence he would have had no reason to question Chan King Ming’s authority to conclude the Licence or doubt the defendant’s right to use the advertising space. I do not accept that Chan Yee Sing was on notice that Chan King Ming was not authorized to make the Licence. However, for reasons that I explain later I do not think that this is material.

25.  The defendant called 2 witnesses to give evidence in respect of the liability issue: Madam Chen and Ms Li. Madam Chen was a director of Silver Faith Ltd, which was a corporate director of the defendant at the material time. Ms Li was her assistant. The two of them were involved in the process of letting the defendant’s properties in Shun Tak Centre, although Madam Chen explained, and this was not challenged, that the decision to let a shop was taken by a shareholder of the defendant, Ng Sun, who is also the owner of the Greek Mythology Group. They deny knowing about the Licence or the tenancy prior to their execution and as I have already noted this evidence was not challenged. It was not suggested to them that any director or shareholder or employee of the defendant knew of the Licence prior to its execution.

26.  As I have already mentioned Mr Kong conceded during his Opening that Chan King Ming did not have actual authority to enter the Licence on behalf of the defendant. What he tried to establish through cross-examination of these 2 witnesses was that there was no clear demarcation between the staff of the Greek Mythology Group and the defendant and that this ambiguity somehow constituted a representation by the defendant that Chan King Ming had authority to enter the Licence. I do not find this an easy argument to articulate, because it is manifestly wrong. The fact that a junior clerk employed by Greek Mythology Entertainment Group Ltd signed receipts for rent paid to the defendant cannot possibly constitute a representation by the defendant that Chan King Ming had authority to enter the Licence. As I explained to Mr Kong if the plaintiff wished to advance an argument that the way in which the Greek Mythology Group and the defendant carried on business created some form of composite representation that Chan King Ming had the alleged authority and that this representation was relied on by the plaintiff it was necessary for the plaintiff to plead the matters on which it relied, adduce evidence of these matters and demonstrate that Chan Yee Sing was both aware of them and relied on them.

27.  Chan Yee Sing had not had any previous dealings with the defendant or the Greek Mythology Group prior to Chan King Ming contacting him in February 2006. There is no evidence to suggest that he had reason to believe that it was within Chan King Ming’s normal area of responsibility to negotiate and conclude agreements for the use of any part of the defendant’s property portfolio or the LED TV panel and light boxes in particular. There is no evidence to suggest that to Chan Yee Sing’s knowledge Chan King Ming had been conducting business for the Greek Mythology Group, which might reasonably be taken by third parties to suggest that he was authorised by the defendant to make an agreement like the Licence. It is also obvious on the face of the particulars pleaded under paragraph 3A of the Amended Statement of Claim that the plaintiff cannot point to any act by a person duly authorized by the defendant which might reasonably have been taken as indicating that Chan King Ming had the necessary authority. Chan Yee Sing had no dealings with any directors of the defendant until after the Licence had been signed and received no documents prior to its execution from a director or employee of the defendant. It seems to me clear that the defendant made no representations of any sort to Chan King Ming at all and certainly none that he was authorised to make a contract such as the Licence on behalf of the defendant. I find that Chan King Ming did not have actual or apparent authority to make the Licence on the defendant’s behalf. It follows that the plaintiff’s claim fails.

28.  The defendant also argued that even if Chan King Ming had authority to enter the Licence the defendant did not own the LED TV panel or the light boxes. I accept that it did not, but if the Licence did bind it this would mean that if it could not make them available the defendant would be in breach of the Licence; it is not a defence to the claim.

29.  In case this matter goes further I shall briefly consider what damages I would have awarded if I had found in the plaintiff’s favour on liability.

Quantum

30.  In the writ the plaintiff claims specific performance or damages although by the time the matter came to trial it had limited its claim to damages. The claim for damages was particularised on 12 June 2009. The claim divides into 2 main sections. The first is for expenses in establishing and operating the plaintiff. The costs claimed (which are items 1 to 13 of the Particulars) total HK$607,099.40. The second and larger portion is the alleged loss of profit. The plaintiff has assumed that the Licence would have run for 3 years and claimed HK$22,941,936.

31.  The plaintiff accepted in its Opening that it cannot recover loss of profit and its actual expenses as there is duplication. Mr. Kong submitted that the costs claim was an alternative to the loss of profit claim. I shall deal first with the loss of profit claim. The evidence in support of the claim for loss of profit was contained in the 2 witness statements of Poon Hung Fai. The first witness statement referred briefly to certain quotes that Mr Poon had prepared in June 2006 and submitted to Chan Yee Sing at a time when the two of them were discussing the plaintiff working together with Mr Poon’s company ALFA Co-ordination and Consultant Ltd. The latter was to find businesses that would advertise through the advertising space. It became clear during cross-examination of Mr Poon that in preparing his lists of prospective advertisers and his estimate of charges he had made 2 erroneous assumptions. First, that casinos, hotels, restaurants, bars and karaoke lounges could advertise in the advertising space. He had not apparently been told that clause 15 of the Licence prohibited advertising of businesses in competition with the business of the Greek Mythology Group. It was pointed out to him that his list of proposed advertisers mainly consisted of businesses that were prohibited. When asked whom he would consider as alternatives he could only come up with gift shops. Secondly, he has also assumed erroneously that the LED TV panel was 5 m by 8 m when if fact it was 5 m by 3 m. He thought that this would only make about 10 to 15% difference in the rate that could be charged for the use of the panel. In my view these errors, which should have been spotted by the plaintiff’s solicitors during the preparation of his witness statement, impact on the usefulness of Mr Poon’s evidence.

32.  Luey Ho Yin, an expert called by the defendant, attacked Mr Poon’s evidence in some detail. Mr Luey has experience in the media aspect of advertising. He considered that Mr Poon’s estimated rates for advertisers were unrealistically high. He compared rates charged to advertisers using plasma screens in the MTR and on external walls in locations such as Times Square and Mongkok. These he demonstrated were considerably lower than the rates that Mr Poon had estimated. Mr Luey also thought that in practice few businesses other than those expressly excluded by clause 15 of the Licence would be interested in advertising in the advertising space. Clause 15 provides “No advertisement material similar to the purpose or nature of the said Greek Mythology Entertainment shall be broadcasted, exhibited and/or shown at the said LED Television panel and/or the advertisement board or panel at the said Exterior Wall”. Mr Luey thought that many businesses would not wish to advertise in this area because of the nature of adjacent advertising, which is mainly for casinos, nightclubs and other entertainment venues and activities. He also thought that Mr Poon seemed to assume an unrealistic amount of traffic in the location of the advertising space. Mr Luey was reluctant to speculate on what might be charged for the advertising space, but he was confident that it would not be sufficient to cover the level of costs that the plaintiff assumed would be incurred in running the business of the plaintiff. I accept his evidence in this regard and find that had the business have been operated it would not have been profitable.

33.  So far as the costs that are claimed are concerned like so much of the plaintiff’s case proper thought has not been given to how it is to be proved. There are no invoices, receipts or accounts proving the items claimed. Further, there is evidence that the plaintiff did carry out some other business from the Unit 3092 during the period it was rented. I cannot assess with any confidence what wasted costs might have been incurred as a result of the defendant reneging on its obligations under the Licence. Had I found in favour of the plaintiff on liability I would not have awarded it anything given the uncertainty as to whether or not it had incurred costs that it failed to cover out of the income earned on its alternative business activities.

Costs

34.  I informed the parties immediately after hearing closing submissions that I had decided to dismiss the plaintiff’s action and that I would hand down my written reasons shortly. Mr Leung asked that I make an order that the plaintiff pay the defendant’s costs of the Action from 14 days after filing of the Defence until the date of the amendment to the Statement of Claim and also that the other costs of the Action be paid by the plaintiff to the defendant. Mr Kong did not object to these orders.

35.  Mr Leung raised with me the possibility of a wasted costs order being made against the plaintiff’s solicitors. I told the parties that I would not deal with this until I had handed down my reasons and the plaintiff’s solicitors had had the opportunity to consider the reasons and prepare for any application that the defendant wished to make. I think that it is undesirable that I express any views now on the preparation and presentation of the plaintiff’s case other than those that have arisen naturally during the course of the substantive part of this judgment.

36.  I make an order nisi that:

(1)the plaintiff pay the defendant’s costs of the Action from 14 days after filing of the Defence until the date of the amendment to the Statement of Claim such costs to be taxed if not agreed; and

(2)the plaintiff pay the defendant the costs of the Action to be taxed if not agreed.

37.  I will give the parties 7 days from the date of the handing down of these reasons to apply if they wish to vary the order. This will give the defendant the opportunity to make any application that it wishes to make.