LEE YUK SHING v. DIANOOR INTERNATIONAL LTD (In Liquidation)

CACV 185/2015

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 185 OF 2015

(ON APPEAL FROM HCMP NO. 2483 OF 2011)

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J U D G M E N T

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Hon Yuen JA:

1.  I agree with the judgment of Kwan JA and Harris J.

Hon Kwan JA:

A. INTRODUCTION, BACKGROUND AND ISSUES

A1. Introduction

2.  This is an appeal by a company in liquidation, Dianoor International Limited (“the defendant”), against the judgment of To J on 2 July 2015, given after a six-day trial in July and December 2014.  The action was brought by Lee Yuk Shing (“the plaintiff”) pursuant to a court order on 29 December 2011 made on an interpleader application taken out by Equipnet Asia Pacific Limited (“Equipnet”), which carried on business as an auctioneer.

3.  The plaintiff’s claim against the defendant is for the return of money (being the purchase price of $1,050,000 plus the auctioneer’s commission of $105,000) for seven lots of goods described as “rough diamond stones” sold at a public auction by the defendant acting through its liquidators, but the items were in fact synthetic cubic zirconia (“the Stones”).

4.  The judge found in favour of the plaintiff.  He ordered the money paid into court by Equipnet be paid out to the plaintiff, who shall return the Stones to the defendant upon receipt of the said sum, and awarded damages to the plaintiff of $40,000 being the costs of Equipnet deducted from the purchase price and auction premium before the payment of the net amount into court.  The plaintiff succeeded on the claims of fraudulent misrepresentation, negligent misrepresentation under section 3 of the Misrepresentation Ordinance, Cap 284, and breach of contract for total failure of consideration.

5.  In his decision on costs handed down on 30 March 2016, the judge awarded indemnity costs to the plaintiff save for the costs relating to the issue on the construction of the Notice to Bidders and the Conditions of Sale, which he ordered to be taxed on a party and party basis.

A2. The applications before this court

6.  We dealt with three applications on both sides at the outset of the hearing of this appeal.

7.  We allowed the plaintiff to file a respondent’s notice out of time to affirm the judgment on an additional ground.

8.  We allowed the defendant to amend its notice of appeal as per a further revised draft submitted the day before the hearing to raise these matters: (1) to bring an appeal against the decision on costs; (2) to challenge the judge’s finding that the defendant’s vault was only accessible to its “four top managers” and they together were the defendant’s “only controlling minds”; and (3) to challenge the holding on the claim in contract for total failure of consideration, which was not pleaded by the plaintiff.

9.  Mr Anson Wong, SC, who appeared for the plaintiff on appeal[1], had no objection to (1) and (3).  He was opposed to (2) on the ground of lateness and that the plaintiff did not have sufficient time to verify the matters deposed to by the defendant’s solicitor, namely, that there was no reference in the trial bundles or the transcript of evidence to matters that would support the finding the defendant sought to challenge in (2).  He did not seek an adjournment for this purpose.

10.  In the exercise of our discretion, we allowed the late amendment of the notice of appeal to raise the matter in (2) and to hear submissions if there was any irregularity in the proceedings in that the judge’s finding was apparently based on matters located by the judge, not referred to by any party at the trial, and on which the defendant had no opportunity to address him.

11.  The third application was the defendant’s summons to adduce new evidence on appeal relating to the death of the defendant’s former manager, Mr K N M Ziaudeen, on 19 January 2012.  The judge drew an adverse inference against the defendant on the basis of Mr Ziaudeen not having been called to testify.  We exercised our discretion to admit this new evidence.  We accepted the submission of Mr Ashley Burns, SC, who appeared for the defendant on appeal but not below[2], that neither the defendant nor its legal advisers could have foreseen the need to place the evidence of Mr Ziaudeen’s death before the judge with the exercise of reasonable diligence.  During the trial, the defendant was not made aware of the judge’s intention to draw such an adverse inference, nor was the defendant given an opportunity to address this matter at trial.

12.  We have not dealt with the costs of these summonses at the hearing.  I propose to make an order nisi that the costs of each of the summonses are to be in the cause of the appeal.

A3. The background

13.  For present purpose, the background matters may be stated as follows.

14.  The defendant is a member of a group of companies known as the Dianoor group, which used to carry on a very successful jewellery business with offices in London, Hong Kong and other parts of the world.  The Hong Kong arm of the Dianoor group was made up of the defendant and two other companies.  On 25 April 2008, the Hong Kong court appointed Mr Kevin Mawer of KPMG LLP, Mr Patrick Cowley and Mr Edward Middleton both of KPMG China as the receivers and managers of those three companies.  In December 2008, the employees petitioned for the winding up of the companies for non-payment of wages.  The same individuals were appointed as provisional liquidators of the companies in December 2009 and later as joint and several liquidators of the companies in July 2010.

15.  Upon the appointment of the receivers, Mr Middleton secured the assets of the defendant.  On 2 May 2008, he and his staff arranged for the opening of the vault in the defendant’s office by Chubb Security.  An inventory of various items of jewellery in the vault was taken by them in the presence of an independent solicitor, Mr Damien Laracy.  Among the jewellery was a collection of eight stones inside a piece of folded paper, seven of which were the Stones.  KPMG was not able to identify any entry in the defendant’s books and stock inventory referable to the eight stones.

16.  On 3 May 2008, a staff of KPMG arranged for a gratuitous survey of the jewellery items in the vault by Mr Alex Wong, who is a graduated gemmologist and an assistant manager of a branch office of Chow Tai Fook Jewellery Co Ltd.  Mr Wong wrote to KPMG giving a rough estimate of all the jewellery items at $7 million, but did not give a breakdown of the individual items.

17.  On 3 June 2008, the receivers obtained a court order for the sale of ten items of jewellery.  Nine of them had been valued by the Hong Kong Gems Laboratory to be worth $1,056,200.  The ten items were subsequently sold for $648,000.

18.  In December 2008, there was an auction in London of various jewellery items including 12 lots of jewellery which belonged to the defendant apparently, and two of the items were sold for £226,000.

19.  In April 2009, Mr Ziaudeen wrote to the receivers claiming ten items of jewellery kept in the vault as belonging to him personally.  The receivers responded with a request for proof of ownership.

20.  In mid April 2010, Mr Middleton decided to sell all the jewellery items and appointed Equipnet as the auctioneer.  Delivery of all the jewellery items to Equipnet was completed on 6 September 2010, with a collection list prepared by KPMG in which the eight stones were described as “diamond stones (8 pcs) 70.59 carats”.

21.  On 20 October 2010, the liquidators wrote to Mr Ziaudeen giving him notice of an auction to be held in November 2010 of the items of jewellery still held by the companies and stating that in the event of his failure to substantiate his claim to certain items within 14 days, the liquidators would proceed with the auction on the basis that those items of jewellery were vested unencumbered in the companies.

22.  Mr Ziaudeen replied by letter dated 25 October 2010 stating that of the ten items he claimed as his personal property, the liquidators had returned five items to him and the others were still pending.  He maintained that the outstanding items had nothing to do with company stock.  He stated that he held the key to the vault and kept his belongings there.

23.  Mr Middleton and Mr Francis Yau, a director of Equipnet, executed the Exclusive Public Auction Sale Agreement between the defendant and Equipnet in mid November 2010.  Mr Middleton left it to Equipnet to identify and evaluate each item for the purpose of establishing a reserved price and for the preparation of the auction catalogue.  In the catalogue, the eight stones were identified as Lots 94 to 101 and each was described as “Rough Diamond Stone” with an approximate weight.  Attached to the catalogue was the Notice to Bidders and Conditions of Sale.

24.  Equipnet placed advertisements for the auction in English and Chinese newspapers on various dates between 16 and 23 November 2010, inviting the public to the auction on 24 November at 1:30 pm in a hotel in Tsimshatsui, with preliminary viewing between 10:30 am and 1:30 pm.  The jewellery items for auction stated in the advertisements included “eight rough diamond stones of a total weight of 70.59 carat”.

25.  In the morning of 24 November 2010, the plaintiff and his uncle attended the hotel.  The plaintiff operated a small jewellery business under the mentorship of his uncle.  After completing the registration formality, he was given a bidder number and a copy of the catalogue showing the items available for auction.  They saw the eight stones on display at the previewing session.  Each was placed inside two layers of sealed transparent plastic bags, which rendered any reliable visual examination impossible.  The plaintiff asked to have the stones taken out for examination and testing with a diamond testing pen he brought along, but a staff refused his request.

26.  The plaintiff and his uncle attended the auction in the afternoon with the uncle’s friends, Mr Steven Lui and Mr Lo Siu Fung.  At the auction, the auctioneer asked the persons attending if they had any difficulty understanding English.  Mr Yau followed by asking in Chinese if anyone would require Chinese translation.  There was no response from the floor.  The auctioneer then allowed the potential bidders about five minutes to read the catalogue, the Notice to Bidders and Conditions of Sale.  He went through the main terms and conditions, in particular the “As Is” clause in the Notice to Bidders which read:

“All goods are sold “AS IS, WHERE IS, WITH ALL FAULTS” Illustrations, pictures or weight are for the convenience of buyers only. The auctioneer has used its reasonable endeavors to ensure that the description of each lot(s) appearing in this catalog are accurate, but buyers are recommended to rely upon such description at its own risk.”

27.  The auctioneer invited the potential bidders to raise questions, but no question was raised.

28.  Before the bidding of each item began, a picture of the item was projected on the screen and the auctioneer gave a short description.  Each of the eight stones was described by the auctioneer as “rough diamond stone” when its picture was shown.  Each 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.  Mr Lui successfully bid for four other items.

29.  Equipnet issued to the plaintiff one Buyer Invoice as per the name in the plaintiff’s business card “Simon Lee, Kalencody Company” for all the eleven items.  The plaintiff and his party went to a nearby branch of HSBC where Mr Lo paid for the plaintiff’s purchase by direct transfer from his HSBC account to Equipnet’s designated account with HSBC.  The plaintiff was issued a receipt and his party collected the Stones and the other items bought.

30.  When the plaintiff and his party later took the Stones out of the plastic bags, they were alarmed by the smooth appearance and decided to have them examined by a gemmological testing centre.  On examination, the Stones were found to be synthetic cubic zirconia.

A4. The issues on appeal

31.  These are the issues raised on appeal and they will be considered in this order:

(1)   the claim in fraudulent misrepresentation: if there was actual knowledge of the falsehood;

(2)   the claim in fraudulent misrepresentation: if there was recklessness as to the falsehood;

(3)   the claim in negligent misrepresentation;

(4)   the claim in contract and the contractual provisions;

(5)   whether the plaintiff is entitled to the remedy;

(6)   the costs below and on appeal.

B. FRAUDULENT MISREPRESENTATION – ACTUAL KNOWLEDGE

B1. The judge’s findings

32.  The judge took into account the representations made in the advertisements, the catalogue and the video presentation at the auction.  It is not in dispute that they were false.  For the plaintiff to succeed in fraudulent misrepresentation or deceit, he would need to establish, among other things, that the defendant had knowledge of the falsity of the representations or was reckless as to the falsity, not caring whether the representations were true or false.

33.  No evidence was given by the liquidators as to the defendant’s lack of knowledge of the nature of the Stones.  The judge approached the question of the defendant’s knowledge by inference.  He held that it was open to him to draw as the only reasonable inference that the defendant knew that the Stones were not rough diamond stones on the basis of the facts he found in §109:

“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.”

34.  The judge reasoned further in §§110 and 111:

“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. … 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.”

35.  In §113, the judge concluded the defendant had actual knowledge that the Stones were not rough diamond stones.  He had no difficulties in accepting that the liquidators and Equipnet had no such knowledge, but their lack of knowledge is irrelevant.

B2. Whether an adverse inference could be drawn

36.  There are a number of reasons why an adverse inference could not be drawn and a finding that the defendant knew of the falsity of the representations should not have been made and is plainly wrong.

37.  First and foremost, we are concerned with an allegation of fraud.  Bearing in mind the seriousness and gravity of the misconduct alleged, recognition must be given to an inherent degree of improbability of its occurrence.  Whilst an inference of fraud may be drawn on the basis of circumstantial evidence where direct proof is not available, such an inference must be properly grounded in the primary facts found and the court must guard against indulging in conjecture under the guise of drawing an inference where the primary evidence does not logically and reasonably justify the particular inference in question.  There is the need for such a disciplined approach to the drawing of inferences, in particular for inferences of fraud or serious misconduct to be drawn only where such inferences are compelling.  These propositions are clearly explained in Nina Kung v Wong Din Shin (2005) 8 HKCFAR 387 at §§181 to 187.

38.  Assuming for the time being the judge was correct in the primary facts he found as mentioned in §109, those facts taken together do not establish a prima facie case against the defendant.  The fact that the Stones must have been kept in the vault by the four top managers or by one of them does not lead to a reasonable and definite inference that he or they knew the Stones were not rough diamond stones.  It was mere conjecture and suspicion and is not properly justified by the primary fact as found.  It was equally possible that the person or persons who kept the Stones in the vault believed they were rough diamond stones, or they would not have been kept locked up securely with genuine items of valuable jewellery.  It is not permissible for the court to choose between the more likely of two guesses, when neither would give rise to a reasonable and definite inference.

39.  It would be wrong to draw an adverse inference of knowledge as the judge had done in the last sentence of §109, holding that “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.”  No prima facie case had been made out against the defendant for it to displace.  And the judge had wrongly assumed there was available evidence the defendant could have adduced to displace the prima facie case which he should not have found established.

40.  This brings me to the findings regarding the access to the vault by the four top managers, that they were the only controlling mind of the defendant, and the evidence the defendant could have adduced as mentioned in §§110 and 111.

41.  No evidence was adduced at the trial that the defendant’s vault was accessible to four top managers, who were not identified in the judgment save for Mr Ziaudeen.  It would appear to have been made on material located by the judge.  The defendant’s solicitors adduced evidence before us that the judge had dealt with three applications for validation orders by the receivers and provisional liquidators, in the course of which he would have considered the three reports prepared for such purpose.  According to one of the reports, it was mentioned that Mr Ziaudeen was the only person in possession of the key and password for the vault.  The solicitors could find no suggestion in any of the reports that other persons had access to the vault.

42.  Mr Burns referred us to Re Ping An Securities Ltd (2009) 12 HKCFAR 808 at §§42, 5 and 6, in which the Court of Final Appeal regarded it as irregular and inappropriate for the Court of Appeal to embark on an independent search for evidence.  In that case, the parties’ attention was drawn to the material located by the Court of Appeal and they were given an adjournment to file further evidence.  Here, the defendant was not told of the material found by the judge and was not given an opportunity to address the material not placed before the court at the trial.  I agree with Mr Burns there was an irregularity in the proceedings and the prejudice suffered by the defendant was greater than in the case he cited.  In these circumstances, the primary finding that the vault was accessible only to the four top managers cannot be supported.  And as this finding cannot stand, the further finding that the four top managers were the only controlling mind of the defendant such that their knowledge should be attributed to the defendant must also be set aside.

43.  The judge took the view there is nothing to suggest that Mr Ziaudeen, whom he found largely responsible for the day to day operation of the defendant, was not available to testify and the liquidators had made no enquiry from him about the Stones after this action was commenced.  On the premise of the liquidators’ failure to call Mr Ziaudeen and their failure to explain why not, the judge drew an adverse inference against the defendant that his evidence would be detrimental to the defendant’s case of lack of knowledge.  This adverse inference and finding cannot stand in the light of the new evidence admitted on appeal that Mr Ziaudeen had passed away in January 2012, before the statement of claim in these proceedings was filed.  At the trial, no question was raised by the judge or the plaintiff why Mr Ziaudeen was not giving evidence.  Mr Wong’s suggestion that the liquidators should have offered an explanation why they did not call Mr Ziaudeen seems to me to be a counsel of perfection.  I do not think it should be held against the liquidators for failing to explain why they did not call him.  As it would be wrong to draw an adverse inference that Mr Ziaudeen had knowledge that the Stones were not genuine, the further finding that such knowledge should be attributed to the defendant must also be set aside.

44.  Mr Wong sought to salvage the position by contending that there were other circumstances found by the judge which clearly cried out for enquiries to be made about the Stones and that the judge could have drawn an adverse inference against the defendant based on the failure to make such enquiries.  I will discuss these matters when I consider recklessness and negligent misrepresentation.  Suffice it to say any such adverse inference that may be drawn is clearly insufficient to support a finding of a fraudulent state of mind.

45.  Lastly, it must be borne in mind that to establish fraudulent representation, the plaintiff must establish lack of honest belief of the defendant that the representation was true (either knowledge of the falsehood or reckless as to this) and the intention that the representee should act on the representation.  Even assuming that the defendant knew the Stones were not genuine, there was no evidence and the judge made no finding that the defendant had known about the impugned representations being made by its agents, the liquidators and Equipnet.  The judge had found in §113 the liquidators and Equipnet had no knowledge that the Stones were not genuine.

46.  Where a misrepresentation is made not by the defendant but by his agent who does not know it is false, if the defendant knows the circumstances which make the representation false but does not know the representation was being made, the tort of deceit is not committed, as neither the defendant nor the agent has the necessary fraudulent state of mind.  Even on the assumption that the representation was made in the course of the agent’s employment or within the scope of his authority, the fact that the defendant would have the necessary state of mind had he known that the representation was being made does not make him in fact fraudulent (Cartwright, Misrepresentation, Mistake and Non-Disclosure (3^rd ed) at §5-21(3); Bowstead & Reynolds on Agency (20^th ed) at §8-185(d); Cornfoot v Fowke 151 ER 450 at 456).  Devlin J put it well in Armstrong v Strain [1951] 1 TLR 856 at 872: “There is no way of combining an innocent principal and agent so as to produce dishonesty.  You may add knowledge to knowledge, or … state of mind to state of mind.  But you cannot add an innocent state of mind to an innocent state of mind and get as a result a dishonest state of mind.”

47.  Mr Wong’s submission that the defendant had authorised the liquidators and Equipment to make the false representations must be rejected.  For the purpose of establishing the necessary fraudulent state of mind, it is insufficient that the agents were acting within the scope of their authority, it must be established the principal knew that the representation was being made.  Mr Wong’s reliance on §8-185(b) in Bowstead is also misconceived.  There is no factual basis here to support the proposition in that paragraph that the defendant was guilty of positive wrongful conduct by consciously permitting the liquidators and Equipment to remain ignorant of the true facts so as to prevent the disclosure of the truth to the representees, or in the hope that the agents would make the false representations.

48.  So for the above reason as well, the finding that the defendant had the requisite knowledge for fraudulent misrepresentation cannot be sustained.  I turn to consider recklessness as the other basis for the fraudulent state of mind.

C. FRAUDULENT MISREPRESENTATION – RECKLESSNESS

49.  In §114, the judge accepted the statement of Widgery CJ in MFI Warehouses Ltd v Nattrass [1973] 1 WLR 307 at 312F and 313G as “the correct test for recklessness” and he proceeded to “examine the Liquidators’ conduct against this test”.  The relevant parts of the statement quoted by the judge read:

“[a party can be found to have acted recklessly if it] … did not have regard to the truth or falsity … even though it cannot be shown that [the party] was deliberately closing his eyes to the truth, or that he had any kind of dishonest mind.”

50.  The statements of Widgery CJ were made in a very different context.  That case was concerned with a criminal prosecution under section 14 of the Trade Descriptions Act 1968, which makes it an offence of recklessly making a statement which was false by means of an advertisement.  Widgery CJ was construing the relevant statutory provision in the statements quoted.  He was not laying down a test for recklessness in the tort of deceit.  At 312F to G, the argument addressed to him by the prosecutor was that “reckless” in the statutory provision had a wider meaning than the common law meaning of recklessness derived from Derry v Peek (1889) 14 App Cas 337.  At 313F to H, he declined to accept that anything less than “Derry v Peek recklessness” would do and concluded that “recklessly” in the context of the Act “does not involve dishonesty” and accordingly “it is not necessary to prove that the statement was made with that degree of irresponsibility which is implied in the phrase ‘careless whether it be true or false’.”  He then made the statements as quoted by the judge, namely, that it suffices if the prosecution can prove that the advertiser “did not have regard to the truth or falsity of his advertisement even though it cannot be shown that he was deliberately closing his eyes to the truth, or that he had any kind of dishonest mind.”

51.  There is clearly a difference between the test for recklessness in common law deceit and the test embodied in that part of the statement of Widgery CJ as quoted by the judge in §114.  It would appear that the judge had applied the wrong legal test for recklessness in fraudulent misrepresentation.  The representor will be fraudulent if he made the statement “recklessly, careless whether it be true or false” (Derry v Peek at 374).  Lord Herschell in Derry v Peek was at pains to emphasise that negligence is not sufficient for deceit, since recklessness involves not caring whether the statement is true: an indifference to the truth (at 361, 369, 373 and 374).  The expression “not caring” had nothing to do with not taking care, it meant not caring in one’s own heart and conscience whether the statement is true or false.  It is well established that to establish common law deceit, a degree of dishonesty or moral turpitude has to be present.  In this context, the moral obliquity consists of an indifference to the truth, a wilful disregard of the importance of the truth (Joliffe v Baker (1883) 11 QBD 255 at 275; Angus v Clifford [1891] 2 Ch 449 at 471; Le Lievre and Dennes v Gould [1893] 1 QB 491 at 501; Thomas Witter Ltd v TBP Industries Ltd [1996] 2 All ER 573 at 587g to h).

52.  The judge is wrong in law in holding that recklessness for fraudulent misrepresentation will be established even if it cannot be shown that the defendant was deliberately closing its eyes to the truth or that it had any kind of dishonest mind.  The judge framed the “crucial issue” and his finding in this context in §117: “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.”  In the judge’s discussion of the issue of recklessness of the liquidators, he repeatedly described the liquidators as being “negligent”, “grossly negligent”, not taking steps which “any reasonable liquidator” would have taken, going “far beyond the realm of gross negligence” (at §§121, 123, 132 and 133).  He was assessing the liquidators’ conduct against the notions of negligence, reasonableness and not taking care.  He had not directed his mind to the correct legal test for recklessness in this context.

53.  Mr Wong sought to argue to the contrary and pointed to these passages in the judgment.  In §128, the judge said that Mr 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”.  In §132, he made the finding 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”.  In §133, the judge took the view that the liquidators “went far beyond the realm of gross negligence.  They were reckless”.  Mr Wong submitted that reading the judgment as a whole and the above passages in particular, the judge had applied the correct legal test in finding recklessness.

54.  I do not agree with his submissions.  I do not think the passages emphasised by Mr Wong would go to show that the judge had approached the matter correctly with the view to ascertain whether there was any degree of dishonesty or moral turpitude of the liquidators.  Gross want of caution on their part cannot be stretched to constitute wilful or wicked indifference that is necessary for a fraudulent state of mind.  The finding of recklessness of the liquidators’ conduct cannot be sustained.

D. NEGLIGENT MISREPRESENTATION

D1. The judge’s findings

55.  The burden is on the defendant to prove that it was not negligent (§135).  This is the effect of section 3(1) of the Misrepresentation Ordinance which provides that it is for the representor to prove that “he had reasonable grounds to believe and did believe up to the time the contract was made that the facts represented were true.”

56.  The judge found that the plaintiff has proved the elements required to support a claim for negligent misrepresentation and the defendant or the liquidators have failed to prove no negligence on their part (§137).

57.  The judge found at §117 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 liquidator, who admittedly are not experts in jewellery and did not know what the eight stones really were, simply assumed that they were diamond stones and allowed their staff to inform Equipnet of the same and that representation, albeit modified by Equipnet as rough diamond stones, was then passed onto the plaintiff and other potential bidders.

58.  The judge was of the view that the circumstances cried out for enquiries to be made of the stones (§120).  The liquidators could find no entries in the defendant’s books and stock inventory referable to the stones (§120).  There was no tenable basis for the liquidators to assume that the Stones were genuine. In this connection, the judge mentioned the statement of Mr Laracy that there was a piece of folded paper containing a small plastic bag with small diamonds (§121); the gratuitous opinion of Mr Wong who made an estimation of the global value of all the items of jewellery (§122); the sale of jewellery items from the Dianoor Group in London and the expert reports on nine other items in Hong Kong and their subsequent sales (§125).

59.  The liquidators could easily have made enquiries of the stones from the persons who were given access to the vault or from other members of the staff.  In particular, enquiries should have been made from Mr Ziaudeen who was largely responsible for the day to day operation of the defendant and was resident in Hong Kong (§131).

60.  The judge dismissed as a mere excuse that the liquidators found it too costly to obtain an expert valuation of all the items of jewellery to be auctioned.  The reserved price for the eight stones at $1,130,000 was worth more than 25% of the total reserved price of all the items and each stone was given a reserved price ranging from $80,000 to $200,000.  Given the value of the reserved price, the eight stones or at least one of them deserved to be tested for authenticity and properly valued (§§128 and 130).  Without a proper valuation, the liquidators or Equipnet could not have determined an appropriate reserved price and the liquidators could not have satisfied themselves that Equipnet “has used its reasonable endeavors to ensure that the description of each lot(s) appearing in this catalog are accurate”, as stated in the Notice to Bidders (§127).  They failed to take steps which any reasonable liquidator would have taken (§133).

61.  The judge found that the liquidators had not exercised “simple common sense and prudence” and the attitude was “couldn’t care less” in that they had failed to obtain a proper valuation, they left it to their staff to refer the stones to Equipnet as “diamond stones” and then they left it to Equipnet to represent in the advertisements, the catalogue and video presentation that they were “rough diamond stones” and to fix the reserved prices on that basis (§128).  The judge took the view that the liquidators did not care whether the eight stones were genuine and conveniently and boldly assumed they were diamond stones or rough diamond stones (§132).  In so doing, the liquidators went far beyond the realm of gross negligence and were reckless (§133).

D2. Discussion of the arguments on appeal

62.  Mr Burns contended there was no sufficient evidential basis for the finding of negligence and the judge was plainly wrong in concluding that the liquidators had no reasonable grounds to believe and did not believe that the impugned representations were true.

63.  He submitted that the judge failed to give any or any sufficient weight to a number of matters mentioned in the witness statement of Mr Middleton: that the defendant was a reputable international business selling quality jewellery items; that the Stones were locked in a vault in the defendant’s office premises among other jewellery items; that according to Mr Middleton’s evidence, Mr Wong had described the Stones as “rough diamond stones” and the judge was wrong to infer in §123 that Mr Middleton knew Mr Wong only gave a valuation on the assumption that the jewellery items were genuine and did not vouch for their authenticity; that nine sets of jewellery of the defendant were valued by the Hong Kong Gems Laboratory at a total of over $1million; that various jewellery items of the defendant consisting of diamonds were auctioned in London in 2008 and sold for an aggregate of £226,000; that as the liquidators do not have expertise or training in assessing and valuing the jewellery items, they left it to Equipnet to identify and evaluate each item for the purpose of establishing a reserved price and preparing the auction catalogue and Equipnet changed the description of the Stones from “diamond stones” on the liquidators’ collection list to “rough diamond stones”; that Mr Ziaudeen never indicated to the liquidators that any of the jewellery items in the vault were other than genuine; that the advertisements for the auction provided that interested parties could arrange for a viewing of the auction and none of the parties who had inspected the Stones made any comments suspecting their authenticity; and that the Notice to Bidders had made clear all auction items were sold “AS IS, WHERE IS, WITH ALL FAULTS” and the Conditions of sale provided inter alia that any representation as to genuineness was only a statement of opinion and buyers should exercise and rely on their own judgment and liability for any misdescription of the goods was excluded.

64.  I do not think the defendant has surmounted the high hurdles to challenge the findings of fact and findings of mixed fact and law in relation to negligent misrepresentation.

65.  In respect of findings of primary fact and secondary fact based on inference, the appeal court can only intervene when it is satisfied that the findings are plainly wrong, and it is incumbent on the appellant to identify palpable errors in the judge’s assessment of the evidence that are sufficiently material to undermine his conclusions.  Assertions that the finding is against the weight of the evidence or that the judge had overlooked certain evidence because it was not mentioned in the judgment are not errors that come within that category (China Gold Finance Ltd v CIL Holdings Ltd, CACV 11/2015, 27 November 2015, §§11 to 24).

66.  As to a finding of mixed fact and law or an issue on which the judge had to come to a judgmental conclusion after taking a number of factors into account, the correct approach for an appeal court in reviewing such a conclusion is to treat the original decision with utmost respect, and refrain from interference unless satisfied that it proceeded upon some erroneous principle or was plainly and obviously wrong.  This is because there will sometimes be room for a legitimate difference of opinion as to what the answer should be, where it will be impossible to say that one view is demonstrably wrong and the other demonstrably right.  The vaguer the standard and the greater the number of factors which the court has to weigh up in deciding whether the standards have been met, the more reluctant an appellate court will be to interfere with the trial judge’s decision (George Mitchell Ltd v Finney Lock Seeds Ltd [1983] 2 AC 803 at 816A to B; In re Grayan Building Services Ltd [1995] Ch 241 at 254; Pro Sieben Media AG v Carlton UK Television Ltd [1999] 1 WLR 605 at 612F to 613B).

67.  Most of the matters Mr Burns said the judge had not given any or any sufficient weight to have been considered and analysed in the judgment, see §§109, 122, 125, 127, 128, 131 and 132.  Besides, what appropriate weight should be given to a particular piece of evidence is a matter for the trial judge.

68.  The judge is entitled to reject Mr Middleton’s hearsay evidence on Mr Wong’s advice (§129).  He is entitled to find to the contrary that Mr Middleton did not place any reliance on Mr Wong’s valuation (§123) and to find Mr Middleton’s reliance on the absence of suggestion by Mr Wong that the Stones were anything other than genuine was “hardly credible” (§124).  Mr Middleton accepted in cross-examination that Mr Wong was not asked to check whether any item of jewellery was genuine and made his appraisal on the assumption that all the goods were genuine.  Mr Middleton also acknowledged in his testimony that the fact Mr Wong had mentioned there were eight rough diamond stones did not mean he had vouched for their genuineness.  Mr Middleton was specifically asked why Mr Wong was not called to testify, and he replied there was no particular reason (transcript, page 13, lines H to K, O to R; page 32 line Q to page 33 line E).

69.  On the basis of the available evidence and the findings he made, I do not think the judge could fairly be criticised for drawing an inference in §123 that Mr Middleton knew Mr Wong only gave a valuation on the assumption that the jewellery items were genuine and did not vouch for their authenticity.

70.  Mr Burns has not identified any palpable error in the judge’s assessment of the evidence sufficiently material to undermine his findings of fact.  Nor has he shown the judge’s conclusion that there was negligence of the liquidators had proceeded on some error in principle or is clearly unsustainable.

71.  Mr Burns submitted that having concluded that the liquidators were liable under section 3 of the Misrepresentation Ordinance, the judge did not proceed to consider the exemption clauses which the defendant has pleaded in its defence, before deciding that the plaintiff is entitled to judgment in the claim of negligent misrepresentation.  He submitted that the exemption clauses should be considered in view of section 4 of the Ordinance.  The judge only discussed the exemption clauses in an earlier section of his judgment when he analysed the claim in contract.

72.  In the earlier part of the judgment at §93, when the judge set out his conclusion in respect of all the exclusion clauses relied on by the defendant, he mentioned expressly that “insofar as they purport to exclude liability for express or implied warranty or for misrepresentation”, the clauses do not meet the reasonableness test.  Section 4 of the Misrepresentation Ordinance provides that the reasonableness test to be applied is as stated in section 3(1) of the Control of Exemption Clauses Ordinance, Cap 71 (“CECO”).  The judge cannot be faulted in considering the effect of the exemption clauses in the earlier part of the judgment in one go.  There is nothing in Mr Burns’ contention.

73.  I would uphold the judge’s finding of liability on the claim for negligent misrepresentation.

E. THE CLAIM IN CONTRACT AND THE CONTRACTUAL PROVISIONS

E1. Whether a claim in contract was pleaded

74.  Apart from fraudulent misrepresentation and negligent misrepresentation, the judge found in favour of the plaintiff in a cause of action for breach of contract in that the plaintiff claimed entitlement to the return of the purchase price because the contract entered into between him and the defendant was a specific contract for the purchase of rough diamond stones but the Stones delivered were not. In other words, this was a case of non-fulfilment or total failure of consideration and the plaintiff is entitled to the return of the purchase price and the commission of Equipnet which had been paid into court (§§50 and 94).

75.  Mr Burns submitted that a cause of action for breach of contract and total failure of consideration was not pleaded by the plaintiff.  The only case pleaded was misrepresentation.  It was not open to the judge to have made findings on an unpleaded case.  He reminded the court of these decisions of the Court of Final Appeal: Kwok Chin Wing v 21 Holdings Ltd (2013) 16 HKCFAR 663 at §§21 to 27; Sinoearn International Ltd v Hyundai-CCECC Joint Venture (2013) 16 HKCFAR 632 at §§27 to 34; and Aspial Investment Ltd v Mayer Corp Development International Ltd (2014) 17 HKCFAR 401 at §§20 to 22.  These authorities made clear that pleadings are to set out the true extent and nature of a dispute, that pleaded issues define the scope of the evidence and not the other way round, and one does not sift through the evidence adduced in a trial in the hope that something was said that can conceivably found a cause of action.  It is unacceptable for unpleaded issues to be raised out of the evidence which is to be or has been adduced.  A party should not be permitted to run at trial an unpleaded case.  Mr Burns submitted fairness dictates that the judge’s findings on the claim for breach of contract should be set aside.  It is irrelevant that the plaintiff’s counsel was not stopped by the judge from running the case for breach of contract in his submissions.

76.  It is correct that the statement of claim pleaded a case of misrepresentation and alleged that they were made fraudulently and/or negligently.  The reliefs claimed were: a declaration that the plaintiff is entitled to the return of the purchase price and the commission paid to Equipnet; alternatively, a declaration that the plaintiff is entitled to rescind the agreement of sale and purchase; an order for the release of the sums paid into court by Equipnet; damages; further or alternatively, damages for fraudulent misrepresentation or deceit; alternatively, damages for misrepresentation under section 3 of the Misrepresentation Ordinance.

77.  The statement of claim did not plead a claim for breach of contract.  However, the material facts in support of such a claim have been pleaded: that the sale by public auction was conducted on the basis that the goods in question were “Rough Diamond Stones”; that the plaintiff bid for the goods, purchased them and paid the purchase price and the commission of Equipnet on that basis; the goods were in fact synthetic cubic zirconia and their value was much less than rough diamond stones.  There was a claim in the prayer for relief for a declaration that the plaintiff is entitled to the return of the purchase price and the commission paid to Equipnet.

78.  Mr Wong relied on Suen Shu Tai v Tam Fung Tai [2014] 4 HKLRD 436 at §§9.2 to 9.4, which cited this statement of Lord Denning in Re Vandervell’s Trust (No 2) [1974] Ch 269 at 321 to 322: “It is sufficient for the pleader to state the material facts. He need not state the legal result.”

79.  I am inclined to agree with Mr Wong that material facts sufficient to support a claim for the return of the purchase price have been pleaded.  Breach of contract is a possible legal consequence arising from these material facts pleaded.  Of course it would have been much better if the plaintiff had pleaded not just the material facts but specifically the issue he wished to raise to give fair notice of the points of law that would be taken in due course.  But as Cheung JA said in Suen Shu Tai at §9.4, “the extent of the pleading, which serves to identify the issues, must depend on the context of an individual case.”  In this instance, I am not persuaded there was any unfairness to the defendant.

80.  In the written opening submissions of the plaintiff, it was submitted that he is entitled to relief because the goods were not rough diamond stones “and the contract entered for anything else could be set aside” and “the agreement under the auction was not to conclude for simply anything; it was a specific contract intended to be made between the parties for “rough diamond stones”.” (§§5 and 6) See also the oral submissions of the plaintiff in the transcript at page 13 lines J to K.  It was further submitted at §29 that the wording of the exemption clause was not wide enough to cover the present situation of supplying fake rough diamond stones and the statement of Lord Abinger in Chanter v Hopkins (1838) 4 M & W 399 at 404 was cited: “the contract is to sell peas, and if he sends him anything else in their stead it is a non-performance.”  So the legal consequence of the material facts pleaded by the plaintiff was made known at the outset of the trial.  The defendant’s counsel responded to this in his written opening submissions at §§9, 11 to 13 and 25.

81.  In the written closing submissions, the plaintiff’s counsel returned to the case of non-fulfilment of contract in greater detail at §§27 to 43.  The defendant’s counsel responded to this at §§56 to 61 of his written closing submissions, basically repeating the points made in his written opening.  There is no suggestion that the parties were unable to focus on the issues that required consideration at the trial, and no suggestion that the evidence might have taken a different course.

82.  I do not agree the judge was in error in entertaining a claim for breach of contract in this situation.

E2. The interpretation of “description” and “misdescription”

83.  The next issue relates to the judge’s construction of the word “description” in paragraph 6 of the Notice to Bidder and clause 11(d) of the Conditions of Sale.  The judge held in §§63 to 68 and 91 that these words refer only to matters of condition or quality of the goods but not the nature of the subject matter and so these provisions would not exclude liability for misdescription as to the nature of the goods put up for auction.

84.  Mr Burns submitted that the judge had adopted an overly-restrictive construction of the words which robbed them of their plain, ordinary and natural meaning.  He contended that the judge should have adopted a more liberal approach in construing exemption clauses post-CECO.  The contractual provisions should be construed against the factual matrix that this was a liquidator’s sale and advertised as such, and as the liquidators have no expertise in jewellery, they could not reasonably be expected to vouch for the authenticity of the goods put up for auction.  Submissions to similar effect were made to the judge by the defendant’s trial counsel.

85.  I could discern no error in the judge’s approach in construing the words “description” and “misdescription” in the relevant provisions.

86.  The judge had considered the dictionary meanings of the word “description”.  Given the dictionary meanings, he accepted that the word “description” in paragraph 6 of the Notice to Bidder may refer to description as to quality, such as appearance, colour, brightness, etc; or may refer to description of the nature of the subject matter such as rough diamond stone; or to both the quality and nature of the subject matter.  He then construed the words in the contractual provisions against the factual matrix.  He had regard to the fact that this was a liquidator’s sale but did not think that was all.  This was a sale conducted by a reputable auctioneer in a five-star hotel of the goods of a reputable international business selling quality jewellery items.  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 would flout business commonsense for the auctioneer to say that by the word “description”, he meant to exclude liability for description as to the nature of the goods put up for auction.  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, clear and unambiguous language is needed, such as the wording in clause 11(a) of the Conditions of Sale, which will be discussed later on, where there is an express reference to representation as to attribution and genuineness.

87.  I would uphold the judge’s construction of paragraph 6 of the Notice to Bidder and clause 11(d) of the Conditions of Sale.

E3. Whether there was a sale by description or of specific goods

88.  Mr Burns’ next complaint was that the judge’s analysis as to the nature of the sale of the Stones was internally inconsistent.  Having concluded at the beginning of §94 that the sale was of specific goods and not a case of sale by description, the judge went on to hold in the same paragraph that “though not a case of sale by description, it is a term of the contract that the Stones sold are rough diamond stones on an “as is” condition.  As the Stones delivered were not rough diamond stones, this is a case of non-fulfilment or total failure of consideration.”  In effect, the judge was saying that the defendant was in breach of contract because the Stones delivered were not rough diamond stones as provided in the contract.  To come to this view, the judge must have considered that the description “rough diamond stones” constituted a “substantial ingredient in the identity of the thing sold”, which is typical of what the authorities provide to be a sale by description, see Benjamin’s Sale of Goods (9^th ed) at §§11-012 and 013, Harlingdon and Leinster Enterprises Ltd v Christopher Hull Fine Art Ltd [1991] 1 QB 564 at 571 to 575, per Nourse LJ.

89.  Mr Wong recognised the internal inconsistency in the judgment and sought to uphold the judgment by contending in the respondent’s notice that the judge’s decision should be affirmed on the additional ground that the sale of the Stones was a sale by description and the Stones did not correspond with such description.  He submitted that as a matter of law, a sale by description and a sale of specific goods are not mutually exclusive, citing in support this statement of Lord Wright in Grant v Australian Knitting Mills Ltd [1936] AC 85 at 100:

“It may also be pointed out that there is a sale by description even though the buyer is buying something displayed before him on the counter: a thing is sold by description, though it is specific, so long as it is sold not merely as the specific thing but as a thing corresponding to a description, e.g., woollen under-garments, a hot-water bottle, a second-hand reaping machine, to select a few obvious illustrations.”

90.  Slade LJ in Harlingdon and Leinster Enterprises Ltd at 583F to 585A explained the law clearly in this way:

“There is no statutory definition of the phrase “a contract for the sale of goods by description”. … There may be little difficulty in applying the phrase in the case of a sale of unascertained or future goods, since there can be no contract for the sale of goods of these categories, except by reference to a description of some sort. The greater difficulty is likely to arise in cases such as the present where the sale is of “specific goods” within the meaning of section 61 of the Sale of Goods Act 1979 – that is to say, “goods identified and agreed on at the time a contract of sale is made.”

There is no doubt that a contract for the sale of specific goods is capable of falling within section 13(1) [relating to a contract for the sale of goods by description]. However, if it is to do so, it has to be a contract for sale “by description” according to the ordinary meaning of language. The word “by” … makes this much plain: the fact that a description has been attributed to the goods, either during the course of negotiations or even in the contract (if written) itself, does not necessarily and by itself render the contract one for “sale by description.” If the court is to hold that a contract is one “for the sale of goods by description,” it must be able to impute to the parties (quite apart from section 13(1) of the Sale of Goods Act 1979) a common intention that it shall be a term of the contract that the goods will correspond with the description. If such an intention cannot properly be imputed to the parties it cannot be said that the contract is one for the sale of goods by description within the ordinary meaning of words. …

… where a question arises as to whether a sale of goods was one by description, the presence or absence of reliance on the description may be very relevant in so far as it throws light on the intentions of the parties at the time of the contract. If there was no such reliance by the purchaser, this may be powerful evidence that the parties did not contemplate that the authenticity of the description should constitute a term of the contract – in other words, that they contemplated that the purchaser would be buying the goods as they were.”

91.  In the present case, each of the Stones was described in the catalogue as “rough diamond stone” with an approximate weight and the description was repeated in the video presentation immediately before the auction.  The judge found in §106 that the plaintiff was induced by the representation to bid for the Stones.  There was clearly reliance by the purchaser on the description on the judge’s finding.  As Mr Burns has argued, the judge must have considered the description “rough diamond stone” constituted a “substantial ingredient in the identity of the thing sold”.  There is proper basis to impute to the parties it was their common intention that it should be a term of the contract that the goods put up for auction would correspond with the description.  Properly analysed, even though the sale was of specific goods, the judge should have found it was also a sale by description, and the internal inconsistency complained of in the judgment would fall away.

92.  Mr Burns also argued that having found the sale was of specific goods and not by description, the judge erred in applying CECO to the exemption clauses in the Notice to Bidders and the Conditions of Sale.  This is because section 11(3) of CECO applies the reasonableness test to contract terms that exclude or restrict liability under section 15 of the Sale of Goods Ordinance, Cap 26, which only governs a contract for the sale of goods by description.

93.  As I am of the view that this was a contract for the sale of goods by description, section 11(3) of CECO applies to the present situation.  It is therefore unnecessary to consider the alternative argument of Mr Burns on the applicability of the reasonableness test in CECO based on section 8 of that ordinance.

E4. Clause 11(a) of the Conditions of Sale

94.  Clause 11(a) of the Conditions of Sale read as follows:

“Any representation or statement made by the Auctioneers in any catalogue as to the authorship, attribution, genuineness, origin, date, age, provenance, condition, estimated selling price or otherwise of any Lot is only a statement of opinion, neither the Auctioneers nor their servants/agents are responsible for the correctness of such statements. Every interested person should exercise and rely upon his own judgment as to all matters affecting the Lot(s).”

95.  Mr Burns argued that the judge was wrong in holding that CECO should apply to clause 11(a).  He submitted that this clause does not purport to exclude liability for misrepresentation or incorrectness in description as to the genuineness of the items.  Properly analysed, this clause defines the basis on which the contracting parties transacted business and the extent of each party’s obligations.  It prevents liability from arising and does not exclude liability, so it is not subject to CECO.  He cited Avrora Fine Arts Investment Ltd v Christie, Manson & Woods [2012] PNLR 35 at §§142 to 146 which in turn cited Springwell Navigation Corp v JP Morgan Chase Bank [2010] EWCA Civ 1221 at §181 for the proposition that a provision that seeks to prevent an assumption of responsibility would be subject to the equivalent of the CECO regime in the UK if it attempts “retrospectively to alter the character and effect of what has gone before” or “to rewrite history or parts company with reality”.  He argued that was not the case here with clause 11(a), since the auction was by order of the liquidators who could not have been expected to have any specialist knowledge of the items put up for auction, and potential buyers were given the opportunity to inspect the items before deciding whether to participate in the bidding.

96.  I agree with Mr Wong that to construe clause 11(a) in that way would not give effect to the manifest intention of CECO but would emasculate this piece of legislation.  This kind of warning was given by Lord Templeman in Smith v Eric S Bush [1990] 1 AC 831 at 848D to E in relation to a clause purporting to prevent a valuer’s negligence liability from arising as not being subject to the reasonableness test in the UK equivalent of CECO.  Section 5(1) of CECO expressly provides that particular provisions of the ordinance “also prevent excluding or restricting liability by reference to terms and notices which exclude or restrict the relevant obligation or duty.”

97.  In my view, clause 11(a) is in substance an attempt to exclude or restrict liability.  To construe this provision as merely defining the extent of each party’s contractual obligations so as to negate the assumption of responsibility by the defendant “parts company with reality”.  The reality was that the Stones were advertised and described as “rough diamond stones”; that they were the goods of a reputable international business selling quality jewellery items; that the sale was conducted by a reputable auctioneer in a five-star hotel with a reserved price comparable to that of genuine items; and that the auctioneer represented it had used its reasonable endeavours to ensure that the description of each lot appearing in the catalogue was accurate, as stated in the Notice to Bidders.  The assumption of responsibility in this context is in relation to the task at hand, namely, the making of the representation to potential bidders, not the assumption of legal liability (Avrora Fine Arts Investment Ltd at §145).  Quite clearly, the defendant and its agents had assumed responsibility for the task of making the representation.  It would be an attempt “retrospectively to alter the character of what has gone before” if clause 11(a) were to be construed as negating the assumption of that responsibility.  I agree with the judge that CECO should apply to the exemption clauses including clause 11(a).

E5. Exemption clauses and reasonableness under CECO

98.  Here, the defendant sought to challenge the judge’s conclusion that the exemption clauses did not satisfy the requirement of reasonableness in CECO.  This is a judgmental conclusion the judge arrived at after weighing up a number of findings of fact he had made.  As mentioned earlier, an appeal court in reviewing such a conclusion would treat it with the utmost respect, and refrain from interfering with it unless satisfied that it proceeded on some error in principle or was plainly wrong.

99.  As rightly held by the judge, the only clause which excludes liability for misdescription as to the nature of the goods described in the catalogue is clause 11(a) of the Conditions of Sale.  The judge took the view that as such an exemption clause would negate the underlying purpose of the contract, it could only be given effect if adequate notice of this term had been given, whether the purchaser knew or ought reasonably to have known of the existence and extent of the term (see factor (c) in Schedule 2 of CECO).  It is a question of fact whether notice is adequate in a particular situation (§81).

100.  The pertinent facts found by the judge were these.  The plaintiff had not been alerted to clause 11(a) (§82).  The 17 clauses in the Conditions of Sale, including clause 11(a), were printed in such small font size on one sheet of A-4 size paper as to make the words “barely readable”.  The word “genuineness”, which is the single most important word in clause 11(a), appeared only once in the document containing the Conditions of Sale and this word or this clause did not stand out (§83).  The potential bidders were given about five minutes to read the catalogue, the Notice to Bidders and the Conditions of Sale before the auction commenced, although they could have read them beforehand if they received the documents earlier.  Although the auctioneer drew the audience’s attention to some of the exclusion clauses, he had not drawn their attention to clause 11(a).  A clause to the effect of clause 11(a) would not have been anticipated in an auction of this class.  The plaintiff did not know and ought not reasonably to have known of the existence of clause 11(a) (§84).

101.  On the totality of all the factors mentioned in §§81 to 85, the judge found that clause 11(a) did not meet the reasonableness test.

102.  Clause 4(a) of the Conditions of Sale excludes liability for inaccuracy in the video presentation and bidders were deemed to have inspected the goods and had notice of their conditions.  It applies to notice as to quality and not notice as to the nature of the goods.  Clause 11(d) deemed bidders to have inspected and approved of the condition of each lot prior to the auction and excludes liability for misdescription as to the conditions or quality of the goods.  The judge held that the deeming provisions of inspection in these clauses do not meet the reasonableness test due to the lack of opportunity to inspect (§§73 and 92).  But as these provisions only related to misdescription as to quality and not the nature of the goods, they are not relevant to the present claim and it is not necessary to consider them further in this appeal or to deal with the arguments of Mr Burns that the plaintiff was estopped from contending he did not inspect the Stones premised on contractual estoppel.  I will just consider Mr Burns’ arguments on the reasonableness requirement by directing them towards clause 11(a).

103.  Mr Burns argued that the judge was in error in applying the observations of Denning LJ in J Spurling Ltd v Bradshaw [1956] 2 All ER 121 at 125F, that “the more unreasonable a clause is, the greater the notice must be given of it.  Some clauses which I have seen would need to be printed in red ink on the face of the document with a red hand pointing to it before the notice could be held to be sufficient.”  He submitted this case was concerned with whether an exemption clause had been incorporated into a contract and there was no question here that the exemption clause in question had not been incorporated.  He contended that the judge failed to have regard to the principle in Interfoto Picture Library Ltd v Stiletto Visual Programmes Ltd [1989] 1 QB 433 that it is only when an exemption clause in a contract contains a particularly onerous or unusual condition that the party seeking to enforce it has to show that it was brought fairly and reasonably to the attention of the other party.  He submitted that the exemption clauses, which included clause 11(a), were neither onerous nor unusual.

104.  I do not accept the above submissions.  The judge rightly bore in mind in §84 that exclusion clauses would be expected in auctions of this nature, particularly one of a sale by liquidators.  But he held that an exclusion clause like clause 11(a) which goes to the root of the contract is rare and requires great notice to be given of its existence.  The judge has not made any error in law in applying the established principles.  The dicta of Denning LJ in J Spurling Ltd v Bradshaw were quoted by Bingham LJ in Interfoto Picture Library at 443B to C, with the observation that the dicta had made explicit what earlier authorities had foreshadowed, that what would be good notice of one condition would not be good notice of another, the reason being that “the more outlandish the clause the greater the notice which the other party, if he is to be bound, must in all fairness be given.”

105.  Mr Burns then argued that the exemption clauses including clause 11(a) were brought fairly and reasonably to the plaintiff’s attention.  I have mentioned earlier the facts found by the judge.  There is no proper basis to challenge the judge’s finding to the contrary.

106.  Lastly, Mr Burns submitted that the judge failed to give any or any sufficient weight to these matters: the auction was by order of liquidators who could not have been expected to have specialist knowledge of the items put up for auction; the plaintiff and his partners and associates who accompanied him to the auction were dealers in precious stones including diamonds and were experienced at attending auctions and familiar with auction procedures and general terms of business.  He asserted that the plaintiff did not have any reasonable basis to rely on any representation made as to the nature of the Stones.

107.  These matters were all considered by the judge, see in particular §§84 and 106.  The judge declined to give them the weight urged upon him by the defendant in coming to the judgmental conclusion that clause 11(a) did not meet the reasonableness test.  He did not proceed on any error or principle, nor could it be said that his conclusion was plainly wrong.  There is no basis for the appeal court to interfere with his decision.

108.  For all the above reasons, I would uphold the judge in finding for the plaintiff in the claim for breach of contract and that the plaintiff is entitled to the return of the purchase price for total failure of consideration.

F. WHETHER THE PLAINTIFF IS ENTITLED TO THE REMEDY

109.  Mr Burns argued that the plaintiff did not discharge the burden that he was entitled to the remedy.  The Stones were paid by Mr Lo who made a direct transfer from his HSBC account to Equipnet’s HSBC account and both the plaintiff’s uncle and Mr Lo said in evidence that it was the uncle who repaid Mr Lo.  Mr Burns contended there was no “objective evidence” to show that the plaintiff had paid for the Stones or had contributed to payment.  Since the money paid for the Stones did not belong to the plaintiff, he could have no proprietary rights over the Stones.  Mr Burns also invoked the unjust enrichment principle in that the claimant has to be the direct provider of the benefit and he is not entitled to the restitution of benefits conferred by a third party rather than himself.

110.  Mr Wong referred us to Bank of Cyprus UK Ltd v Menelaou [2015] UKSC 66 at §§23 to 27 for the proposition that in a claim for unjust enrichment, it is unnecessary that there must be a direct payment from the claimant to the defendant.  Where there is a sufficient causal connection, in the sense of a sufficient nexus or link, between the loss to the claimant and the benefit received by the defendant, the requirement of enrichment at the claimant’s expense would be satisfied.  Here, the judge accepted the uncle’s evidence that he had repaid Mr Lo for the Stones, and that the relationship between the uncle and the plaintiff was so very close that their funds and their company’s funds all belonged to the family pot: they put money into the family pot and drew what they or their business needed from it.  On this evidence, the judge found as a matter of fact the plaintiff has repaid Mr Lo (§48).  Mr Wong submitted that on the judge’s findings, it is sufficient to satisfy the requirement of a sufficient causal connection so that the plaintiff is entitled to sue for the remedies of rescission and return of the purchase price.

111.  I am inclined to agree with Mr Wong’s submissions.  I note also that the judge had accepted the plaintiff’s evidence that he was bidding in the capacity of a joint venture with his uncle and Mr Lo (§39).  The joint venture was on a “case-by-case” basis.  How the three parties would share in the profit and costs was not explored but there is nothing to cast 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, and for Mr 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.  That being the case, it would hardly matter as among the parties to the joint venture, who had made payment initially or who had reimbursed whom initially.  A party to the joint venture is entitled to pursue a claim for the loss to the joint venture against a third party, and account to his partners later for any recovery made.

112.  There is no substance to the arguments that the plaintiff is not entitled to the remedy claimed.

G. THE COSTS BELOW AND ON APPEAL

113.  To recap, I would not uphold the judge on the claim for fraudulent misrepresentation.  I would uphold the judgment on the claims for negligent misrepresentation and breach of contract.  The appeal of the defendant should be dismissed.

114.  We have not heard arguments on costs, whether of the appeal or the costs below.  So any order we are to make on costs would be nisi.

115.  For the costs of the appeal, I propose to deprive the plaintiff, who is the successful party, of part of his costs, to reflect the outcome that the judge’s findings of fraudulent knowledge and recklessness for the purpose of deceit must be set aside.  I would order the defendant to pay the plaintiff 60% of the costs of this appeal.

116.  On the costs below, the judge awarded costs to the plaintiff on an indemnity basis except for the costs of the argument on the issue as to the construction of the Notice to Bidders and the Conditions of Sale which shall be taxed on a party and party basis.  In the amended notice of appeal, the defendant seeks to set aside that costs order and replace it with an order that the costs of the trial below, including the costs as between the plaintiff and the defendant of the interpleader application taken out by Equipnet, be to the plaintiff, and to be taxed on a party and party basis.

117.  I think that would be a fair order to make in the circumstances, given the plaintiff’s overall success at the trial and the judge’s criticisms of the liquidators’ conduct of this litigation and his feeling of affront that the liquidators had not conducted their defence in good faith would be lessened somewhat by the different views arrived at on appeal that the findings of fraudulent knowledge and recklessness in that context should not have been made.

118.  I also agree with the judgment of Harris J.

Hon Harris J:

119.  I have read and agree with the judgment of Kwan JA, but wish to address briefly the way in which the Liquidators dealt with the sale of the stones, which the judge considers in the section of his judgment dealing with the deceit claim.  I shall use the same definitions as those adopted by Kwan JA.

120.  The judge accepted that the Liquidators were unaware that the stones were not rough diamonds.  It was the evidence of Mr Edward Middleton, one of the Liquidators, summarised in para 22 of his witness statement that that he assumed that the stones were rough diamonds for a number of reasons.  First, the Defendant was a reputable jeweller.  Secondly, the valuation of the items in the vault, including the stones, by Mr Alex Wong who was a gemmologist at Chow Tai Fook Jewelry Co Ltd., and that he had been told by his colleague, Carmen Lee, that Mr Wong had described the stones to her during a telephone conversation as “rough diamond stones”. Thirdly, the proceeds of a sale of the Defendant’s jewellery at an auction in London, which were substantial.

121.  Once the decision had been made to sell the stones and other jewellery in April 2010 it was Mr Middleton’s evidence that his principal concern was to ensure that the Defendant was not in any way liable in the event of a problem arising in respect of the sale.

122.  In paras 117 to 133 of the judgment the judge considers in detail Mr Middleton’s reasons for assuming that the stones were genuine.  He is critical of Mr Middleton’s explanation and evidence.  In para 133 the judge concludes:

“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 were 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.”

123.  As Kwan JA has explained in para 65 of her judgment, in respect of findings of primary or secondary fact the appeal court should only intervene when it is satisfied that the judge is plainly wrong.  It is not the function of this court to undertake an assessment of the totality of the evidence and determine whether it agrees with the first instance judge’s finding.  Like Kwan JA I am not satisfied that the defendant has demonstrated that the judge made findings that it was not open to him make on the evidence before him.  I understand, however, why the Liquidators, and Mr Middleton in particular, would be sensitive about the judge’s conclusions and the way he chose to express himself, but that in itself is irrelevant to the determination of this appeal.  The judge was clearly affronted by the way in which the case was conducted and the defendant’s decision to take issue with every element of the case including requiring initially the plaintiff to prove that the stones were not genuine rough diamonds.  The judge’s frustration with what he obviously saw as an irresponsible approach by the Liquidators to defending the claim is made clear in a number of parts of the judgment in particular paras 46 and 49. It may be that this informed his assessment of the evidence.  This was a risk that should have been recognised by the Liquidators’ legal advisers.  The way in which the litigation was conducted by the Liquidators shows in my view poor judgment on the part of whoever was making decisions.

124.  Where I would differ from the judge is in respect of his comments about what a responsible liquidator should have done in the position in which the Liquidators found themselves.  The principal obligation of a liquidator of an insolvent company is to collect in and realise the assets of the company for the benefit of its creditors.  This is a process, which should be conducted as cost effectively as possible.  A responsible liquidator should aim to minimise costs.  It does not seem to me, as it seemed to the judge, that it was necessary for the Liquidators to obtain an expert’s opinion on the nature and quality of the stones.  It was open to the Liquidators to take the view that the stones in the vault were probably diamonds and put them up for auction, but given the lack of anything reliable in writing recording what the stones were, such a robust approach necessarily gave rise to the risk that the stones might turn out to be something else.  Mr Middleton seems to have been alive to the need to ensure that the documents prepared for the purposes of the auction were very carefully drafted in order to protect the Liquidators in case the kind of problem that has arisen did occur.  As the stones were described as rough diamonds in the auction brochure it was always going to be very difficult to exclude liability in the event that it transpired that the stones were something else.  The more prudent course might have been to have obtained a written appraisal of the stones rather than proceed on the assumption that they were probably diamonds and to try and obtain protection by drafting exclusion clauses that avoided liability for misdescription.  Which course to choose was a matter for the Liquidators.  Unfortunately in the present case the choice turned out to be the wrong one, but this should not encourage liquidators to focus on protecting their own position rather than the interests of creditors when called upon to make decisions of this sort for fear of being subjected to excessive criticism.