FIRST ASIA FINANCE INTERNATIONAL LTD v. TSO AU YIM & YEUNG

HCA 2128/2013

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 2128 OF 2013

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J U D G M E N T

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1.  This is an action against a firm of solicitors (Defendant) by the Plaintiff in connection with a settlement agreement (Agreement) between the Plaintiff and Asset Channel Holdings Ltd (Asset Channel), which was drafted by the Defendant and dated 11 February 2010.

2.  It is the Plaintiff’s case that the Defendant was acting as its solicitors as well as those of Asset Channel in the drafting of the Agreement pursuant to an oral retainer.  Alternatively, it is contended that the Defendant had voluntarily assumed responsibility over the drafting of the Agreement such that it owed a duty of care in tort to the Plaintiff. 

3.  The Plaintiff says that the Defendant had breach its duty of care (whether in contract or in tort) in that it failed to draft an enforceable settlement agreement. 

4.  The Defendant denies that it was acting for the Plaintiff in the drafting of the Agreement.  It was acting only for Asset Channel.  Further, there was no assumption of responsibility which can be relied upon by the Plaintiff; the Agreement was not unenforceable; and, in any event, the Plaintiff cannot show any loss that was caused by any breach of duty on the Defendant’s part. 

5.  Pursuant to the directions of this court, there is before the court a Statement of Agreed Facts and a List of Issues agreed by the parties.

6.  The critical issue in this case is whether the Defendant was under a duty of care to the Plaintiff in the drafting of the Agreement (whether in contract or in tort).  If that issue is determined against the Plaintiff, its case can proceed no further.  

Background

7.  In light of the Statement of Agreed Facts, the background can be stated succinctly.  The Plaintiff is a BVI company, and was the vehicle used by Mr Howard Ho Wai Tang (Tang) and his friends for making a HK$30 million loan to Wan Hao International Holdings Ltd (Wan Hao) by way of a loan agreement dated 2 October 2008 (Loan Agreement).  There was a guarantor to the Loan Agreement by the name of Mr Huang Dongsheng (Huang), who was the beneficial owner of Wan Hao.  The loan was to be used for acquiring a gold mine in the Mainland.  In the event, only HK$7.5 million was lent (Loan) under the Loan Agreement, and Wan Hao defaulted on its repayment obligations. 

8.  It is common ground that the Loan had gone sour.  However, in late 2009, the gold mine consortium to which Wan Hao belonged was in the position to sell the mining rights to a company listed in Hong Kong, Bright International Group Ltd (Bright Intl).  In order to facilitate the sale, 2 members of the consortium, Mr Bernard Chau (Chau) and Mr Raymond Chiu (Chiu), with the assistance of a business broker, Mr Tony Hoo (Hoo), approached Tang, who represented the Plaintiff, to settle the Loan.

9.  It is an agreed fact that the Plaintiff, acting via Tang at all material times, had originally instructed a firm of solicitors, Messrs Stevenson, Wong & Co (SWC) to advise it in relation to the settlement and to draft a settlement agreement.  Such an agreement was indeed produced by SWC, but Chiu thought that it was too bulky and complicated. Consequently, another simplified settlement agreement was required. 

10.  There is no dispute that the Defendant, via its senior partner Mr Bosco Hon Sai Tso (Tso), was acting for Asset Channel in connection with the drafting of the Agreement. 

11.  The Agreement was a simple 2 page document (excluding the execution clauses).  It contained a proposal for the full and final settlement of all of the Plaintiff’s claims under the Loan Agreement with the transfer by Asset Channel to it a HK$7.5 million convertible note (CN) to be issued by an unnamed company whose shares were listed on the Main Board of the Stock Exchange of Hong Kong.  The transfer was conditional upon the issuance of the CN, and Asset Channel agreed to exercise its best endeavour to procure the transfer of the CN to the Plaintiff. 

12.  Subject to the transfer of the CN, the Plaintiff should refrain and exercise its best endeavour to procure others to refrain from making any claims relating to the Loan Agreement.  Upon the transfer of the CN to the Plaintiff, it would lose the entitlement to any claims relating to the Loan Agreement. 

13.  Clause 13 of the Agreement provided that each party should be responsible for its own legal and other expenses in the negotiation and execution of the Agreement. 

14.  In addition to the Agreement, a document of warranties (Warranty) was executed on 11 February 2010 by Mr Andrew Ka Chun Chow (Chow) in which Chow undertook to procure and warrant that Asset Channel would honour its obligation under the Agreement.  Should Asset Channel fail to do so, Chow would be personally liable to indemnity any loss that might be incurred by the Plaintiff.

15.  It is undisputed that no CN was transferred to the Plaintiff pursuant to the Agreement[1]. 

16.  Pursuant to a writ filed on 22 December 2011, default judgment was obtained by the Plaintiff against Wan Hao and Huang on 2 February 2012.  However, the judgment could not be enforced because neither Wan Hao nor Huang could be found.

17.  This action was commenced on 6 November 2013.

The alleged oral retainer

18.  The above background is not in dispute.  Tang was the only witness for the Plaintiff at the trial.  Therefore, the Plaintiff’s case hinges upon the acceptance of Tang’s evidence.  I regret to say that Tang is a very poor witness.  His evidence sits poorly with common sense, inherent probabilities and the contemporaneous documents. 

19.  I start with a few observations about Tang.  He is an experienced and sophisticated person, having graduated from Chinese University with a degree in business administration and been in the finance business for well over 15 years.  It is of particular interest that Tang is the President of Ample Financial Group.  There is a Hong Kong company related to that Group with the same name as the Plaintiff.  Tang is a shareholder and director of that Hong Kong company, which is a registered money lender. 

20.  Given the agreed fact that the Plaintiff was, at least initially, represented by SWC in the settlement[2], it was very surprising that Tang had denied in cross-examination (Xn) that the Plaintiff was ever so represented by SWC.  According to Tang, he was a very good friend with a partner of that firm, Mr Hank Lo (Lo), and Lo had provided him as a friend with the first draft of the settlement agreement at the end of 2009. 

21.  This denial is quite contrary to the contemporaneous documents.  In particular, by an email dated 15 October 2009 from Tang to Hoo, the former referred to the Plaintiff instructing its legal advisor to prepare a memorandum of settlement.  On 20 October 2009, there was an email and a letter from SWC both of which referred to SWC acting for the Plaintiff.  It would be very unusual for solicitors to represent that they acted for a client when they did not.

22.  I can see no proper explanation for this u-turn, and such evidence does not inspire confidence in Tang’s credibility. 

23.  As reflected by the documents, there were negotiations between Hoo and Tang to settle the liabilities under the Loan Agreement in October 2009.  According to the unchallenged evidence of Hoo (he and Tso gave evidence for the Defendant), he ceased to participate in the negotiations in early November after he had introduced Tso to Chau and Chiu to assist them in the settlement.

24.  On 12 November 2009, Tang sent an email to Tso informing him that Lo would be back to Hong Kong on the next day, and Lo would then call him to fix a meeting. 

25.  The email was followed by a preliminary meeting between Tang and Tso on that day at Tang’s office.  It was their first meeting.  Tang agreed in Xn that because Lo was not available on that day, he contacted Tso to arrange a short preliminary meeting with him. 

26.  During that meeting, Tang told Tso about the Loan Agreement and the background to the settlement.  Tang agreed in Xn that Tso did not give him any advice at the meeting.  However, Tang said that he clearly told Tso that he wanted him to draft a settlement agreement which was legally binding to resolve all the disputes.  Tang said affirmatively that Tso was instructed by him at this meeting.

27.  On the next day (13^th), relevant documents were sent to Tso by Tang, and Tso was told to feel free to contact Lo “to touch base with him … for this matter”. 

28.  On 17 November 2009, there was a meeting between Tso and Lo.  According to Tso, the purpose of the meeting was to obtain more information on the background of the case and the roles of those involved.  Lo told him that he was acting for the Plaintiff.

29.  Tang’s evidence in Xn that Tso was instructed on 12 November 2009 was almost as surprising as his denial that SWC had ever acted for the Plaintiff, because Tang confirmed in examination-in-chief that Tso was instructed by the Plaintiff on or about 28 December 2009 at a meeting between himself, Chiu and Tso at the Gaia restaurant in Sheung Wan[3].

30.  The fact is that Tang had been struggling to identify when the Defendant was instructed by Plaintiff.  An examination of the Plaintiff’s pleadings and affirmation (by Tang on its behalf) shows that its case varied from “in about January 2010”[4] to “in about late January 2010”[5], “on or about 12 November 2009” in Gaia[6], “in about early 2010”[7] and “on or about 28 December 2009” in Gaia[8]. 

31.  It is very difficult to accept Tang’s evidence as truthful or reliable, especially when there was a reasonable amount of contemporaneous documents which could assist him to recall the events.

32.  Apart from the date, the presence or absence of a representative of Asset Channel is important.  If the instructions were given by Tang to Tso in the absence of such a representative (as was the case in accordance with the latest contention of the Plaintiff), it is difficult to see how Tso was instructed jointly by Asset Channel and the Plaintiff.  There is no proper explanation or evidence on this issue of joint instructions. 

33.  Further, the objective indicia do not support the Plaintiff’s case.  Most importantly, the Plaintiff and Asset Channel had a conflict of interest in the settlement.  It would be extraordinary for any solicitors to agree to act for both parties in the circumstances. 

34.  It is not disputed that the Defendant had never rendered any bill to the Plaintiff, and that its bill was sent to and paid in full by Asset Channel.  This further contradicts the Plaintiff’s case of joint instructions.  The joint instructions is also contrary to Clause 13 of the Agreement (see para 13 above).

35.  Furthermore, the emails which came into existence after the alleged instruction of the Defendant on 12 November 2009 militate against the suggestion that the Defendant was acting for both the Plaintiff and Asset Channel.  Quite the contrary, the picture is that the Defendant was acting only for the Asset Channel and the parties were dealing with each other at arm’s length.  It is only necessary to refer to a few examples. 

36.  Firstly, by an email dated 26 November 2009 from Tang to Tso, the former stated that: “the Lender requests at least a draft settlement agreement be prepared by your side …”. 

37.  Secondly, on 23 December 2009 Tso sent a copy of the 1^st draft of the Agreement to Tang.  The covering email stated: “… I have just sent to [Chau and Chiu] for their consideration and comment. The draft shouldn’t be taken as an offer by [Chau]…”. 

38.  Thirdly, Tang provided the Plaintiff’s comments on the 1^st draft on 28 December 2009.  His covering email to Tso stated: “… Lender’s lawyer has not yet reviewed the agreement until next draft which is supposed to incorporate your client’s comment…”. 

39.  Finally, I find Tso to be a credible witness.  I see no reason to doubt his evidence that the Defendant was only acting for Asset Channel.  He was straight forward and spontaneous in the witness box. The only matter worthy of note is that he had mistakenly sent an advice (Advice), which he had given to Chau and Chiu, to Tang when he sent him the 2^nd draft of the Agreement on 21 January 2010.  I accept Tso’s explanation that it was a mistake because: (a) it is self-evident from the Advice that it was meant for Chau and Chiu and (b) Tso was being pressed by Tang for the Agreement, and acting under pressure tends to induce mistake. 

40.  For these reasons, I reject the Plaintiff’s case on oral retainer.

Assumption of responsibility

41.  There is an abundance of authorities on the circumstances where a solicitor can be held liable for his negligence to a person who is not his client.  The test is whether the solicitor has assumed responsibility to exercise care towards that person.  It is an objective test: whether it can reasonably be said that the solicitor has by his conduct accepted responsibility.  See White v Jones [1995] 2 AC 207, 271C to 272A and 274C to 275A; Dean v Allin & Watts [2001] Lloyd’s Rep 605, [33] to [41]; and Yiu Chown Leung v Chow Wai Lam (2005) 8 HKCFAR 592, [7].

42.  Firstly, in Yiu Chown Leung, the Court of Final Appeal agreed with the Court of Appeal that the rejection of the plaintiff’s primary case on the existence of an express retainer sat uncomfortably with the alternative case of assumption of responsibility by the defendant solicitors: see [21] and [24].  The same may be said here.

43.  Secondly, the general rule is that a solicitor acting on behalf of a client owes a duty of care in contract and in tort only to his client.  It was held in White v Jones, supra, at 256B-D :

“First, the general rule is well established that a solicitor acting on behalf of a client owes a duty of care only to his client … when a solicitor is performing his duties to his client, he will generally owe no duty of care to third parties. Accordingly, as Sir Donald Nicholls V-C pointed out in the present case, a solicitor acting for a seller of land does not generally owe a duty of care to the buyer: see Gran Gelato Ltd v Richcliff (Group) Ltd [1992] Ch 560. Nor, as a general rule, does a solicitor acting for a party in adversarial litigation owe a duty of care to that party’s opponent: see Al-Kandari v J R Brown & Co [1988] QB 665, 672, per Lord Donaldson of Lymington M R.”

44.  On duty of care to opposing parties, Cordery on Legal Services, at [3209] stated that :

“Most of the work of a solicitor, whether contentious or non-contentious, is adversarial, and in that it remains the duty of the solicitor to safeguard and advance the interests of his own client, that state of affairs is inconsistent with and conflicts with any suggestions that he may owe a duty of care to opposing parties. Thus … solicitors acting for a proposed borrower of money do not owe a duty of care to the prospective bank lender in relation to the accuracy of information given by them about their client.”

45.  Dean v Allin, supra, was a case involving solicitors acting for a borrower.  The solicitors had made it clear that they could not at the same time act for the lender. However, they were found liable to the lender for negligence in that the security provided to the lender by the borrower under their advice was not effective.  On the issue of assumption of responsibility despite the conflict of interest, the answer rested primarily in the identity of interest between the borrower and lender in the provision of an effective security (on which the solicitors were instructed by the former): see p.615, para 34(6)).

46.  There was no identity of interest in this case. Despite having been invited to address the issue, Mr Chu, who appeared with Mr Chung for the Plaintiff, was only able to suggest that there was an identity of interest between the Plaintiff and Asset Channel to settle the dispute over the Loan.  This could not be an identity of interest.  As will be pointed out below, properly understood, the Agreement did not in fact achieve a settlement.  In any case, the settlement was the purpose or the aim of the transaction.  The settlement plainly involved a conflict of interest.  One only needs to look at the evolvement of the key terms between the 1^st and the 2^nd drafts of the Agreement to see that. 

47.  In my view, the lack of identity of interest is fatal to this part of the Plaintiff’s case.

48.  For completeness, I agree with Mr Lee, who appeared for the Defendant, that the Plaintiff’s pleadings on this part of its case are highly unsatisfactory.  However, I am reluctant to simply dismiss it on that ground alone.  The proper course which the Defendant should have taken was a strike out application prior to the trial.

49.  In any event, absence of any identity of interest aside, there is no substance in what Mr Chu had put forward as giving rise to an assumption of responsibility on the Defendant’s part in favour of the Plaintiff.  He relied heavily on: (a) the direct communication between Tang and Tso; and (b) the Advice. 

50.  In respect of the former, the underlying point is that a solicitor should not be in direct communication with the client of another solicitor[9]. The point was mainly used to support the primary case of an oral retainer. However, Mr Chu accepted that the communications were initiated by Tang. Further, as pointed out by Mr Lee, at the material times Tang projected himself as a representative of the Plaintiff[10] and that he was purportedly taking instructions from the Plaintiff over the settlement.  In these circumstances, it is not altogether clear why Tso should feel inhibited from communicating with Tang, and the matter was not properly explored in the Xn of Tso. 

51.  At most, the direct communication could be a breach of etiquette.  No advice was given by Tso to Tang in the course of the communications, nor is there any indication that Tang was relying on Tso’s advice (this is well demonstrated by Tang’s amendments of the draft Agreements).  I am unable to see how the direct communication could lead to an assumption of responsibility.

52.  As regards the Advice, it was plainly a mistake on Tso’s part to have sent the Advice to Tang (see para 39 above).  This is an opportunistic argument.    

53.  In the premises, I also reject the Plaintiff’s case on assumption of responsibility.  Accordingly, this action must fail. However, for the sake of completeness, I shall, succinctly, deal with the remainder of the issues.

SWC

54.  The evidence tends to suggest that SWC ceased to be involved, at least formally, at certain stage and that Tang was dealing with the settlement himself.  In particular, Tang had amended the 2 draft Agreements by himself.  Indeed, in addition to amending the 2^nd draft, he asked for a “side letter” to be signed and provided a draft of the Warranty to Tso. The draft Agreements were simple documents, and I have no doubt that Tang was, and felt able to, deal with them by himself. 

55.  Although the amendments to the drafts were copied to Lo, it might be the case that Tang felt that by doing so Lo would provide informal advice to him as his friend.  Tang said that Lo was concerned with the matter because he introduced Wan Hao to Tang. 

56.  However, it is neither necessary nor possible (due to the quality of the evidence) to make a finding as to when the Plaintiff ceased to instruct SWC.

Enforceability of the Agreement

57.  Although the Plaintiff complains that the Agreement was uncertain and unenforceable, which I disagree, it is quite transparent that the real complaint is that its terms were unfavourable, ie, it was a bad deal. 

58.  On the law, I agree with Mr Lee that the court is reluctant to strike down a contract for uncertainty (see Chitty on Contracts, 32 edn, vol 1, 2-147 to 2-155).  If no time is stipulated for the performance of a contractual obligation, the law may imply an obligation to perform the obligation within a reasonable time having regard to all the circumstances of the case (Chitty, 21-021). 

59.  In respect of the terms of the Agreement, I agree with Mr Lee that: (a) not having a named issuer for the CN meant that a CN from any company listed in Hong Kong would suffice; and (b) not specifying the precise type of CN meant that any type of CN would have been sufficient.

60.  Properly understood, the Agreement only provided for Asset Channel to exercise its best endeavour to procure the transfer the CN, subject to its successful issuance, to the Plaintiff.  I do not see why the terms are too uncertain to be enforceable.

61.  Tang’s evidence on whether the Plaintiff had attempted to enforce the Agreement is quite vague.  He said that lawyers were instructed.  He was advised that the Agreement was not enforceable, and therefore nothing was done about it.   

62.  In respect of the Warranty, the Plaintiff’s lawyers tried to locate Chow but without success, and nothing further was done.  Tang said that he left everything to the lawyers, and he was unable to tell the court the reason why the Agreement or the Warranty could not be enforced.

63.  I do not believe that Tang had told the truth or whole truth about the enforcement of the Agreement or the Warranty.  He is not a person who would have simply accepted what he was told by the professionals he employed without being told the reasons and convinced that they were valid.

64.  It is plain that the Agreement was of little value.  On the other hand, a solicitor is not, in the absence of unequivocal instructions and acceptance by him to do so, expected to advise on the commercial good sense of a business proposition.  Whether the client should or should not, as a matter of commercial advantage, proceed with a transaction or whether a transaction is or is not good business or prudent are not generally matters for a solicitor.  However, where it is evident that a client relies on the solicitor for more than legal advice, the solicitor may be under a duty to refer the client to an appropriate source of information.  See Foshan Hua Da Industrial Co v Johnson Stokes & Master [1999] 1 HKLRD 418, at 425J to 426E.

65.  Tang admitted that he was very keen to conclude the Agreement.  The evidence is abundantly clear in this regard.  Tang clearly understood what the Plaintiff was getting under the Agreement.  He knew that Asset Channel was a HK$2 company.  Apart from being told that Chow and Chau were related, Tang knew nothing about the former and had carried out no due diligence to find out if he was good for the Warranty.  Plainly, Tang was desperate to get anything out of the sour loan.  It might be the case that he was under pressure from his friends who funded the sour loan to try to salvage something out of it.    

66.  The Plaintiff has not pleaded a case of failure to advise on the quality of the transaction.  It is not entitled to complain about entering into a bad deal with its eyes open.    

Causation and loss

67.  Mr Lee is right to have challenged the Plaintiff’s case on both causation and loss (assuming that the Defendant had breach its duty of care) to the Plaintiff. 

68.  The Plaintiff did not waive its rights against Wan Hao or Huang under the Agreement.  At most, there was a moratorium over the enforcement of the Loan Agreement pending the transfer of the CN.  This is borne out by the fact that the Plaintiff subsequently sued and obtained judgement against both Wan Hao and Huang. 

69.  There is actually no evidence whether Asset Channel did or did not exercise best endeavour to procure the transfer of a CN to the Plaintiff. 

70.  However, assuming that the Plaintiff had wrongly agreed to the moratorium due to the negligence of the Defendant, it is highly questionable whether the delay in enforcing the Loan Agreement had caused any loss to the Plaintiff when it is agreed that it was a sour loan.  There is certainly no evidence of proof of any loss or how it flowed from the breach of duty of care. 

71.  Mr Chu argued that the Plaintiff had lost HK$7.5 million (the principal of the Loan), and that the Plaintiff had lost the opportunity to extract that sum from Chau and Chiu.  With respect, that the arguments are fundamentally misconceived and contrary to the evidence.  The sour loan could not have a value of HK$7.5 million.  The parties negotiating the settlement were all shrewd businessmen.  Chau and Chiu would not have agreed to accept any personal responsibility over that sour loan or the CN. This is reflected by the evidence, eg, that Chau refused Tang’s request to stand as warrantor to the Agreement. 

Conclusions

72.  For the above reasons, I dismiss this action with an order nisi that the costs of this action be paid by the Plaintiff, to be taxed if not agreed.