CHINA EVERBRIGHT FINANCE LTD. AND ANOTHER v. FOREVER LTD. AND ANOTHER

CACV 445/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 445 OF 2000

(ON APPEAL FROM HCA 18676 OF 1999)

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J U D G M E N T

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Hon Mayo VP:

1. This is an appeal from a judgment of Yam J who in turn was hearing an appeal from a decision of Master Poon. In fact there are two appeals but as the subject matter is very similar the result will be the same and it is only necessary to comment upon HCA 18676 of 1999.

2. The Judge upheld the master's refusal to strike out the plaintiffs' statement of claim against D2.

3. The plaintiffs' principal claim is against D1. D1 is a BVI Company. The claim arises under a contract and an oral agreement whereby the plaintiffs advanced moneys to D1 to enable it to deal in securities with the plaintiffs' associate company China Everbright Securities (HK) Limited ("CES"). The amount being claimed is in the region of $21 million.

4. One of the issues in the case is whether D2 represented D1 in these transactions and was authorised to do so. The trading in shares was to be on margin. The claim against D2 is in the alternative. It is for D2's alleged breach of warranty of authority.

5. The claims being made against D2 are contained in paragraphs 5 and 11 of the statement of claim. They are:

"5 In the premises the 2nd Defendant warranted that (a) he had authority to enter into the Contract on behalf of the 1st Defendant; (b) he had authority to present the documents referred to in paragraph 2 above to the 1st Plaintiff on behalf of the 1st Defendant; and (c) he and Janet Lau had authority to place orders with CES on behalf of the 1st Defendant."

"11. Alternatively, if, which is denied, the 2nd Defendant has no authority to enter into the Contract or to present the documents pleaded in paragraph 2 above to the 1st Plaintiff on behalf of the 1st Defendant or the 2nd Defendant and/or Janet Lau had no authority to place orders with CES on behalf of the 1st Defendant, the 2nd Defendant is in breach of his warranty of authority pleaded in paragraph 5 above, and in consequence thereof the Plaintiffs are unable to enforce the Contract against the 1st Defendant and thereby suffered loss and damages.

Particulars

The sum of HK$21,317,778.83 and interest on HK$15,477,375.73 at the Agreed Interest Rate from 11th May 1999 to the date of actual payment."

6. The way that D2 put its application to strike out the claim being made against him is to contend that there are three essential elements to a claim for breach of warranty of authority. The first is that there is a warranty of authority. The second is that there has been a breach of it and the third is that damages have flowed from it.

7. For the purposes of the application D2 was prepared to accept that the first element had been established.

8. It was in connection with the second element that D2 submitted that the plaintiffs were unable to make out a claim against him. Mr Paul Lam for D2 submitted that the plaintiffs have to make out "a solid basis or foundation capable of proof" or at least some evidence that there has been a breach.

9. Mr Lam placed considerable reliance upon the case of Overseas Trust Bank Ltd v Coopers & Lybrand and Others [1990] 1 HKLR 568 in support of this submission.

10. He referred to the passage at p. 583 of the judgment of Fuad VP:

"It seems to me that in these circumstances, owing to the unusual and possibly extravagant nature of this claim, PMM were entitled to seek to show the Court that it was one which should be struck out, not on the ground that the facts disclosed were improbable or that it was difficult to believe that they could be proved, (see per Lord Herschell in Lawrence v. Lord Norreys (1888) 39 Ch D 213 at 217) but on the ground that 'the case has not a solid basis capable of proof ... the story told in the pleadings is a myth ... and has no solid foundation' (per Lord Herschell at p.220) and one where 'the statement of claim presents ... a tissue of improbabilities, which ought not to be sent to proof.'"

11. Mr Lam submitted that these observations were apposite to the present case. What was clear was that the primary claim was the claim the plaintiffs had against D1 that the claim which was being made against D2 was inconsistent with this, and that there was no evidence and support the claim against D2.

12. Mr Wong for the plaintiffs' reply to this was that he was entitled to make use of all of the present material available to make good his contention that there was sufficient evidence to support the claim being made against D2. This included D2's defence and the affirmation he had made.

13. He referred in particular to paragraphs 4 and 7(a) of D2's defence.

14. Paragraph 4 reads:

"4. Paragraph 2 of the Statement of Claim is admitted save that the 2nd Defendant further avers that apart from the documents referred to in the said paragraph, the 2nd Defendant was duly authorized by the 1st Defendant to deliver the following documents duly signed by the 1st Defendant to CES on behalf of the 1st Defendant for purpose of opening a securities trading account:-

(a) Opening Account Questionnaire of CES; and

(b) Uniform Cash Client's Agreement to CES."

15. Paragraph 7(a) reads:

"7. (a) Paragraph 5(a) of the Statement of Claim is denied and the Plaintiffs are put to strict proof thereof. The 2nd Defendant avers he had only delivered the account opening documents in relation to the margin loan account of the 1st Defendant to the 1st Plaintiff on behalf of the 1st Defendant. Such physical delivery should not be regarded as an act of 'entering into' any contract on behalf of the 1st Defendant; and"

16. Mr Wong submitted that paragraph 4 had to be read in conjunction with paragraph 5 which takes issue with the terms of the contract which are pleaded in paragraph 3 of the statement of claim. What D2 seemed to be saying was that the plaintiffs had not informed him what the terms of the contract were.

17. He went on to argue more importantly that it was clear from paragraph 7(a) that his denial of the claim which was being made against him was only a qualified denial. By going on to describe his role as being no more than a rather glorified messenger it could be inferred that he was pleading a lack of authority. In addition to this he had failed to adduce evidence that Janet Lau was also authorised to deal in the shares. From this it could be inferred that she was not so authorised.

18. I do not accept that these inferences can necessarily be drawn from the available material. In my view if the relevant paragraphs and in particular paragraph 7(a) of D2's defence are read as a whole it is abundantly clear that D2 is denying any breach of warranty.

19. The consequence of this is that there is no evidence at all to support the claim which is being made against D2. This is perhaps not altogether surprising having regard to the inconsistent nature of the claims being made against D1 and D2. I accept that in appropriate circumstances it is permissible to pursue inconsistent claims in the alternative. In this connection it may be helpful to refer to the notes in the Hong Kong Civil Procedure 2001 edition at p. 284 on Ord. 18 r. 15. What emerges from this is where the matrix of facts upon which reliance is placed are interwoven or "mixed up" the facts relating to each of the alternative cases should be separately pleaded.

20. While I would not in any way be critical of the manner in which the statement of claim is couched in my view the facts relied upon by the plaintiffs for these claims are mutually inconsistent on the basis of the evidence which is presently available. It appears to me that even having regard to the low threshold which the plaintiffs have to surmount under Ord. 18 r. 19 they have not been able to demonstrate that they have a claim against D2 which should go to trial. That being the case I consider that these appeals should be allowed. The claims against D2 should be struck out and that there should be an order nisi that the plaintiffs should pay D2's costs of the actions including D2's costs of his summons to strike out the actions against him.

Hon Keith JA:

21. I agree that this appeal should be allowed and that the orders proposed by Mayo V-P should be made. I only add a few words of my own out of deference to the judge from whom I have taken a different view of the case.

22. The Plaintiffs' primary case in both actions is against the 1st Defendants. It is that the 2nd Defendant had been authorised by the 1st Defendants

(a) to enter the contracts between the 1st Plaintiff and the 1st Defendants for the provision to the 1st Defendants by the 1st Plaintiff of a margin loan facility ("the contracts") on behalf of the 1st Defendants, and

(b) to present various documents to the 1st Plaintiff on behalf of the 1st Defendants,

and that the 2nd Defendant and Janet Lau had been authorised by the 1st Defendants to place orders with CES on behalf of the 1st Defendants. That that is the Plaintiffs' primary case in both actions is apparent from the words "which is denied" in para. 11 of the Statements of Claim.

23. The Plaintiffs' secondary case in both actions is against the 2nd Defendant. It is that the 2nd Defendant and Janet Lau had not been so authorised by the 1st Defendants. However, since the Plaintiffs' secondary case is alternative to their primary case, the Plaintiffs' actions against the 2nd Defendant must be dismissed if their primary case against the 1st Defendants succeeds. The Plaintiffs are, of course, entitled to pursue their secondary case against the 2nd Defendant in case their primary case against the 1st Defendants fails, even though it is inconsistent with their primary case, provided that there is some evidential foundation for their secondary case.

24. The critical question on this appeal is whether it was open to the judge to conclude that there was some evidential foundation for the Plaintiffs' assertion that (a) the 2nd Defendant had not in fact been authorised by the 1st Defendants to enter the contracts or to present the documents or to place orders with CES on behalf of the 1st Defendants, and (b) Janet Lau had not in fact been authorised by the 1st Defendants to place orders with CES on behalf of the 1st Defendants. We do not know whether such an evidential foundation existed prior to the commencement of the proceedings, because no evidence on the topic has been filed on behalf of the Plaintiffs. The only "evidence" on which the Plaintiffs have relied are various assertions in the 2nd Defendant's Defences and in two affirmations which he made in the actions.

25. The Plaintiffs contend that in those documents the 2nd Defendant was denying that he and Janet Lau had been authorised to act in the manner alleged, and that those denials amounted to an assertion that he and Janet Lau had not been authorised to act in the manner alleged. I disagree. In my view, a fair reading of the 2nd Defendant's Defences and his affirmations (together with exhibits "CYS-1" to both affirmations) show that the 2nd Defendant was not denying that he and Janet Lau had been authorised to act in the manner alleged. What he was denying was that he had warranted that he had had that authority from the Plaintiffs. Since it was to the 2nd Defendant's advantage to admit that he and Janet Lau had been authorised by the 1st Defendants to act in the manner alleged (because then the Plaintiffs' secondary case against him would fail), it would be absurd to read his Defences and affirmations in any other way.

26. The Plaintiffs also contend that since the 2nd Defendant had only asserted in the Defences and the affirmations that (a) he had been authorised to present various documents on behalf of the 1st Defendants and (b) to place orders with CES on behalf of the 1st Defendants, his failure to assert that (a) he had been authorised to enter the contracts on behalf of the 1st Defendants and (b) Janet Lau had been authorised to place orders with CES on behalf of the 1st Defendants amounted to an assertion that (a) he had not been authorised to enter the contracts on behalf of the 1st Defendants and (b) Janet Lau had not been authorised to place orders with CES on behalf of the 1st Defendants. The judge accepted that argument. I take a different view. I do not see why the absence of any assertion by the 2nd Defendant as to his or Janet Lau's authority to perform a particular act on behalf of the 1st Defendants amounted to an assertion that they were not authorised to perform that act.

27. If follows that there is no evidential foundation for the Plaintiffs' assertion that the 2nd Defendant had not in fact been authorised by the 1st Defendants to enter the contracts or to present the documents on behalf of the 1st Defendants or that he and Janet Lau had not in fact been authorised by the 1st Defendants to place orders with CES on their behalf.

Hon Mayo VP:

28. The appeal is accordingly allowed and the claims against D2 are struck out. There will be an order nisi that the plaintiff will pay D2's costs of the actions including the costs of these strike out actions and the appeals.