PAUL Y MANAGEMENT LTD v. ETERNAL UNITY DEVELOPMENT LTD AND OTHERS

HCA 571/2007

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 571 OF 2007

____________

________________________

HCA 1281/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1281 OF 2011

________________________

________________________

(Heard Together)

________________________

D E C I S I O N

________________________

1. There are two summonses. The first summons is issued by the defendants of HCA 571/2007 (“the 1st action”) to lift the stay of the 2nd third party proceedings (2nd TP proceedings”) brought by them against the 2nd third party, PYI Corporation Limited (“PYI”). The stay was imposed by A Cheung J (as he then was) on 1 June 2009 with the concurrence of the parties.

2. The plaintiff in the 1st action is Paul Y Management Limited (“PYM”).  The defendants in this action are Eternal Unity Development Limited (“EUD”) the 1st defendant, Chan Yuk Yan (“Dennis Chan”) the 2nd defendant and the Eternal Unity Properties Limited (“EUP”).  EUD and EUP are and were controlled by Dennis Chan at all material times.  They have also brought the 1st third party proceedings (1st TP proceedings”) against Paul Y Engineering Group Limited (“PYE”). 

3. PYI agrees with the lifting of the stay subject to the 2nd TP proceedings be tried together with the main action and the 1st TP proceedings. 

4. The defendants oppose PYI’s suggestion of trying all matters together.  They say such will delay the trial of the main action and the 1st TP proceedings. 

5. The second summons is issued in HCA 1281/2011 (“the 2nd action”) by Lau Ko Yuen Tom (“Tom Lau”), the 4th defendant therein for the 1st and 2nd actions to be tried together. 

6. The plaintiffs in the 2nd action are Dennis Chan and Eternal Real Estate Development Company Limited (“ERE”).  ERE is and was at all material times controlled by Dennis Chan.  The defendants in this action are Galaxy Land Limited (“Galaxy Land”), PYI and Paul Y Construction (China) Limited (“PY China”).

7. Dennis Chan and ERE oppose the 2nd summons.  They also say that to order the two actions to be tried together will delay the trial of the 1st action (which is not to include the trial of the 2nd TP proceedings).

The first action

8. The 1st action was started by PYM against Dennis Chan, EUD and EUP.  PYM’s claim is for repayment of a HK$10 million loan (“the Loan”) it lent to ERD together with interest pursuant to a loan deed made between PYM and ERD on 25 October 2005 (“the Loan Deed”).  Dennis Chan and ERP also executed the Loan Deed as guarantors and are sued by PYM as such.  All three defendants deny liability.  Their defence involves an elaborate scenario of events.  These evens have been summarized by Tom Lau in para 17 of his affirmation filed on 19 January 2012 in support of his application in the 2nd action and the third party statement of claim in the 1st action.

The allegations of Dennis Chan

9. The events alleged by Dennis Chan are as follows:

(1)  Since about March 2005, Tom Lau (allegedly acting on behalf of PYE) and Dennis Chan discussed methods of co-operation.  The discussions included provision of funding and project management services in relation to a property development in Beijing known as Jiayu Yuen (嘉裕苑) (“the Project”).  In the course of the discussions, PYE carried out due diligence on the financial position and other aspects of ERE and the Project.

(2)  On 22 June 2005, Tom Lau (allegedly for PYE) met with Dennis Chan and allegedly reached on oral master agreement on funding arrangements for completion of the Project (“the Master Agreement”).

(3)  Under the Master Agreement, PYE would, inter alia, within 14 months advance or cause its related companies to advance loans up to RMB420 million (“the Facility”) to ERE for the purpose of financing and completing the Project.

(4)  Part of the Facility, i.e. RMB130,000,000.00 would be used by ERE to redeem the existing mortgage of Block C of the Project held by 中國信達資產管理公司 (“信達”), a financial institution incorporated in the mainland.

(5)  The rest of the Facility would be used for paying the construction and other costs for completion of the Project, and would be advanced at such times and in such sums per the actual need to ensure the completion of the Project and units therein for handover to individual purchasers in 14 months.

(6)  The Facility would be secured by various properties of the Project.

(7)  This security would be provided by ERE by entering into presale contracts of various units of Blocks A, B and C and a leasing contract for the carpark and club house of the Project.  The contracts would have cancellation previsions entitling ERE to cancel the presale or leasing arrangement upon repayment of the sums advanced under the Facility.

(8)  Interest for the advance would be at the basic lending rate of the People’s Bank of China plus 8% per annum.

(9)  PYE would be entrusted with the management of the Project.  It would complete the remaining works timeously and receive 5% of the construction costs as project management fee.

(10)  The sums advanced under the Facility would be repaid after completion of the Project, and repaid in stages upon the sale of the completed units.

(11)  In part performance of or implementation of the Master Agreement, PYE caused two related companies and Dennis Chan caused ERE to enter into the following contracts:

(a)  Framework Presale Agreement for Block C of the Project dated 22 June 2005 (關於 “嘉裕苑” C座商品房預售框架協議) entered into by ERE and Galaxy Land, the 1st defendant in the 2nd action (“Block C Frameowrk Presale Agreement”);

(b)  Leasing Agreement for Clubhouse and Carpark dated 22 June 2005 (關於 “嘉裕苑” 會所及停車場租用權協議) entered into by Eternal Real Estate and Galaxy Land (“Clubhouse and Carpark Leasing Agreement”);

(c)  Framework Presale Agreement for Blocks A and B dated 22 June 2005 (關於 “嘉裕苑” A、B座商品房預售框架協議) entered into by Eternal Real Estate and Galaxy Land (“Blocks A&B Framework Presale Agreement”);

(d)  Project Management Contract (建築項目管理合同) dated 22 June 2005 entered into by ERE and PY China; and

(e)  Memorandum of Understanding (諒解備忘錄) dated 20 October 2005 (“MOU”) entered into by ERE and PY China on behalf of PYE.

(12)  Pursuant to the Master Agreement and Block C Framework Presale Agreement, ERE and Galaxy Land entered into formal presale contracts in Beijing (北京市商品房預售合同) (“the Presale Contracts”) in respect of 124 residential units of Block C.

(13)  In mid-October 2005, Dennis Chan requested to draw RMB10 million as part of the Facility pursuant to the Master Agreement.  By reason of the shortage of RMB in Beijing, Dennis Chan alleged that Mr Wong Wing Hoo Billy and Tom Lau (allegedly for PYE) agreed with Dennis Chan that the sum was to be advanced through PYM in HK dollars and such sum would be repaid in HK dollars upon ERE having received a corresponding advance under the Facility in RMB to be available within 2 months (“the Further Agreement”).

(14)  As a result of and pursuant to the Further Agreement, the defendants in the 1st action entered into the Loan Deed at the request of PYE.  PYM was allegedly acting as the agent of PYE in entering into the Loan Deed with these defendants.

(15)  In breach of the Master Agreement and the Further Agreement, PYE subsequently failed to make the corresponding advance in RMB to the defendants in the 1st action.  PYE also failed to make adequate advance of the Facility to Dennis Chan and ERE for the completion of the Project.  On this basis, it is further alleged that the Loan (admittedly advanced and received) has not yet fallen due.

(16)  In November 2005, Dennis Chan allegedly requested a further advanced of RMB30 million from PYE under the Facility.  An alleged oral agreement was then reached between Dennis Chan and Tom Lau (allegedly for PYI) (“the 2nd Further Agreement”) so that a further sum of HK$30 million being part of the Facility and repayable in 13 months would be advanced to Dennis Chan.  A written procurement agreement dated 7 December 2005 was then entered into between Jenvin Limited (“Jenvin”) (a PYI subsidiary) and Dennis Chan and various companies under his control (“the Procurement Agreement”) pursuant to and as a result of the Master Agreement and the 2nd Further Agreement.

(17)  In March 2006, an oral agreement was allegedly reached between Dennis Chan and Tom Lau (allegedly for PYI) concerning the expansion of Beijing Rosedale Hotel (“the Hotel Expansion Agreement”).  Under the Hotel Expansion Agreement, Dennis Chan was supposedly responsible for securing the Beijing Municipal Government’s approval for the development of around 40,000 m² of additional gross floor area for the Beijing Rosedale Hotel.  In return, he would be paid RMB40 million as consultant fee as well as given the right to use 2,000 m² of the commercial podium or portion of the Hotel Expansion Development for 20 years.

(18)  Dennis Chan alleged that he secured an approval in principle from the Beijing Municipal Government.  However, due to the failure of PYI, the formal approval could not be obtained.  On this basis, Dennis Chan alleged that he had suffered the loss of the consultant fee of RMB40 million and the value of the right to use 2,000 m² of the commercial premises.

(19)  There, however, was allegedly a subsequent oral agreement between Dennis Chan and Chan Kwok Keung Charles (“Charles Chan”) (allegedly for both PYE and PYI) in May 2006 whereby it was agreed that the Loan and the HK$30 million (advanced pursuant to the 2nd Further Agreement) be set off against the RMB40 million payable by PYI to Dennis Chan as his consultant fee under the Hotel Expansion Agreement (“the Set-off Agreement”).

The third party proceedings

10. Apart from defending the claim by PYM for repayment of the Loan, Dennis Chan, EUD and EUP also issued third party proceedings (TP proceedings”) against PYE and PYI in the 1st action.  The TP proceedings against PYE are for various declarations that Galaxy Land, PY China, PYM and Jenvin Limited entered into the various above-mentioned agreements and loan arrangements as agents of PYE and pursuant to the Master Agreement.  They also claim damages from PYE for breach of the Master Agreement.

11. Regarding PYI, they claim a declaration that the Loan advanced in the name of PYM and the HK$30 million advanced in the name of Jenvin had been set-off against the alleged consultant fee of RMB40 million due to Dennis Chan.  They also pleaded the set-off in their defence to PYM’s claim for the Loan.  Dennis Chan also claims damages from PYI for loss of use of the 2,000 m² commercial premises in the Hotel Expansion Development for 20 years.

Claims against Tom Lau

12. In the 2nd action, Dennis Chan and ERE repeated Dennis Chan’s allegations in the 1st action.  In addition, they also alleged that Tom Lau entered into the Master Agreement as the authorised representative of PYE, alternatively, in breach of Tom Lau’s warranty of authority.

13. They further alleged that because of Tom Lau’s directions, Galaxy Land, PYE and PY China had failed to act in accordance with their obligations under the various agreements above-mentioned. 

14. They also alleged that Tom Lau had represented to Dennis Chan that the companies involved in the various agreements would honour their commitments to provide funding or services to ensure the completion of the Project in time.  They then alleged that Tom Lau’s representations were false and were made intentionally, recklessly or negligently.

15. In addition, Dennis Chan and ERE alleged that since late 2004, Tom Lau had represented to Dennis Chan that PYE was the counterparty of the Master Agreement and Tom Lau was authorised by PYE to enter into the Master Agreement and the various other arrangements on its behalf. However, if it should be held that Tom Lau was not authorised by PYE to enter into the various agreements, Dennis Chan and ERE will suffer the loss of not being able to enforce the agreements against PYE.  On that basis, they asserted that Tom Lau should then be held liable for their loss for Lau’s breach of his warranty of authority from PYE.  They therefore claim damages and various relief against Galaxy Land, PYE, PY China and Tom Lau.  The claim against Tom Lau is based on misrepresentation and breach of warranty of authority.

The 1st summons to lift the stay of the 2nd third party proceedings

16. The claim against PYI, the 2nd third party in the 1st action was stayed by A Cheung J with the concurrence of the parties. The reason was that this claim, as based on the Hotel Expansion Agreement and the Set-off Agreement, could be dealt with separately.  However, Dennis Chan now thinks that PYE, as the 1st third party, has obtained discovery from him in relation to the Hotel Expansion Agreement.  Since PYE and PYI are managed by Tom Lau, PYI, as the 2nd third party and through Tom Lau, can have a preview of the discovery on the key issue in the 2nd TP proceedings.  Hence, Dennis Chan wishes to have the stay lifted so that he can have discovery from PYI as well.

17. Furthermore, Dennis Chan says that he has, after the stay was imposed, obtained documents showing that Tom Lau has a secret scheme to take over the Project from ERE and him.  He therefore does not want the stay to remain as that would give Tom Lau and the PY group more time to perpetrate his scheme. 

18. Mr Cheuk, counsel for Dennis Chan, EUD and EUP, further submitted that the issue of set-off in the 2nd TP proceedings forms part of the live issues in the main action.  The reason being that a ground of defence of Dennis Chan, EUD and EUP in the 1st action is that the Loan was advanced under the Master Agreement rather than the Loan Deed and it had been set-off under the Set-off Agreement.  Therefore, the Set-off Agreement will have to be canvassed at the trial of the 1st action. If the stay should remain and the main trial proceeds, the issue of the existence of the Set-off Agreement will be decided in the absence of PYI.  This is problematic and unsatisfactory (see paras 13 and 14 of the skeleton submissions). 

19. However, it seems that Dennis Chan and his companies have changed their position and would now ask only for lifting of the stay but not to try the 2nd TP proceedings together with the main action.  The reason they gave for this change is the delay that may be produced by the preparation of the 2nd TP proceedings.

20. Mr Lam, counsel for PYI disagreed.  He submitted that the preparation of the 2nd TP proceedings for trial should not produce any delay as the issues pleaded are simple.  He also suggested a tight timetable of directions for preparation which will avoid any delay. 

21. In fact, the hearing for directions on expert evidence in the 1st action will only take place in June this year.  It is likely that the preparation for the trial of the 2nd TP proceedings will finish ahead of that for the main action.  The normal rule is also to try all issues together. 

22. Furthermore, the main issue in the 1st action is the credibility of Dennis Chan and Tom Lau.  This issue extends throughout the series of events from late 2004 to 2006 culminating in the Hotel Expansion Agreement.  PYI is also desirous of cross-examining Dennis Chan on the whole story.  It does not mind incurring the legal costs to sit through the whole trial.

23. Mr Lam also refers to the Set-off Agreement with PYI which has been pleaded as a complete defence to PYM’s claim.  For these reasons, Mr Lam submitted that all issues in the 1st action including the 2nd TP proceedings should be tried together.

Analyses and decision on the 1st summons

24. I, having considered all arguments advanced by both sides, am of the view that the stay should be lifted and all issues in the 1st action including the 2nd TP proceedings should be tried together. 

25. The main trial of the 1st action will canvass the Master Agreement and the two Further Agreements.  PYM has to take part in this trial as it is the defendants’ defence that the Loan was not really advanced by PYM under the Loan Deed, but was advanced by it as agent of PYE pursuant to the Master Agreement and Further Agreement.  PYE will also be at this trial as the 1st TP proceedings will be tried with the main action.

26. Regardless of the outcome on these issues, the fact remains that there would be the Loan due from Dennis Chan either as guarantor or as borrower.  If the court should find that the Loan was advanced by PYM pursuant to the Loan Deed, he would be liable as a guarantor of it.  If the court should find that there were the Master Agreement and Further Agreement and the HK$10 million was advanced under them, then he would be held as the borrower. 

27. In the former case, he would be held liable as a guarantor to PYM, but his Set-off Agreement was allegedly made with PYE and not PYM.  It is not entirely clear if he could still rely on the Hotel Expansion Agreement and Set-off Agreements which were allegedly made with PYE.  If he could not, then he would have to pay PYM the loan with interest and PYM would not have to take part at the trial of the 2nd TP proceedings.  The trial of the 2nd TP proceedings would also have nothing to do with the HK$10 million loan.  In the event that he could, then PYM would have to take part in the trial of the 2nd TP proceedings as the Set-off Agreement has been pleaded as a complete defence to its claim for the repayment of the Loan (para 49 of the defence in the 1st action).

28. In the latter case, Dennis Chan would be held as the borrower.  It is not clear whether PYE will want to take part in the trial of the 2nd TP proceedings to contest the Hotel Expansion and Set-off Agreements as it has not pleaded any claim for the HK$10 million loan even as an alternative and in the event of the court finding for the existence of the Master Agreement and Further Agreement.

29. These potential problems will not disappear simply by ordering the 2nd TP proceedings to be tried with the main action. But such an order will procure the availability of all parties so that the appropriate solutions can be knocked out amongst them.  Furthermore, if the 2nd TP proceedings should be tried later and if either PYM or PYE will have to take part in the second trial on the alleged set-off, more costs will have to be incurred.

Order and directions on the 1st summons

30. Since delay is the only concern raised by Dennis Chan and his companies and such concern does not appear to have been borne out by the simplicity of the pleadings on the Hotel Expansion and Set-off Agreements, I consider it preferable for the 2nd TP proceedings to be tried with the rest of the 1st action.  Since the issues in the 2nd TP proceedings are simple, I also do not think there will be overloading of issues.  I therefore lift the stay and order that the 2nd TP proceedings be tried with the other claims in the 1st action.

31. For the sake of prudence, I do grant a liberty to apply for separate trials in case it can be shown later that the preparation for the 2nd TP proceedings would delay the trial of the 1st action.

32. I also adopt the directions proposed by Mr Lam for the preparation of the 2nd TP proceedings.  I order and direct as follows:

(1)  The stay of the TP proceedings against the 2nd third party be lifted;

(2)  The 2nd TP proceedings be tried at the same time as the main action and the 1st TP proceedings in the 1st action;

(3)  The parties to the 2nd TP proceedings shall file and serve their list of documents relating to the 2nd TP proceedings within 14 days from the today;

(4)  There will be inspection of documents between the parties to the 2nd TP proceedings within 14 days after the service of the list of documents by these parties;

(5)  The parties to the 2nd TP proceedings do mutually exchange signed witness statements as to facts within 63 days from the date of inspection of documents, and such statements do stand as evidence in chief unless the trial judge otherwise directs;

(6)  There will be a Case Management Conference of the 2nd TP proceedings, which shall be fixed at the same time as the next Case Management Conference of the main action and the 1st TP proceedings in the 1st action.

The 2nd summons for the trial of both actions together

33. The 2nd summons was issued by Tom Lau in the 2nd action for trying the two actions together.  It can be seen from the above allegations by Dennis Chan and his companies that the claims against Tom Lau in the 2nd action are based on misrepresentation and breach of warranty of authority.  They are pleaded in paras 41 to 49 of the Statement of Claim in the 2nd action.  Dennis Chan and ERE repeated in the 2nd action all the allegations of Dennis Chan made in the 1st action.  In addition, they also pleaded against Tom Lau misrepresentation and breach of warranty of authority. However, the allegations against Tom Lau himself constitute a relatively small part of the allegations in that action and are all factual.

34. Tom Lau now says that it is unfair for his credibility to be decided in the 1st action without his being legally represented at its trial.

35. If Tom Lau has not been sued in the 2nd action, I am sure he would have been contented to leave the issue of his credibility to be taken care of by the lawyers of the PY companies.  However, claims have been made against him personally in the 2nd action, all be it as a fallback position of Dennis Chan as asserted by Mr Cheuk, it appears unfair to Tom Lau if he is not allowed to be represented at the trial of the 1st action when his credibility will be determined.  The solution is to have the two actions tried together.

36. Mr Wong, counsel for Tom Lau, also submitted that because of the overlapping in issues and witnesses, it will save time and costs to have the two actions tried together.  Though the issues addressed to Tom Lau are relatively few, he does not mind incurring the legal costs for his lawyers to sit through the whole trial and to canvass and contest all the allegations made by Dennis Chan.

37. In fact the original intention of Dennis Chan and ERE was to have both actions tried together (see para 11(1) of the Statement of Claim in the 2nd action).  But they have a change of heart now. 

38. To have the two actions tried together will also avoid the risk of inconsistent judicial findings as the Master Agreement and Further Agreement are relied on by Dennis Chan in both actions and the defendants are different in the two actions.

39. Dennis Chan and ERE oppose this application.  I suppose EUD and EDP would take the same stance in the 1st action.  The 1st ground of opposition is delay.  The 1st action was started in April 2007.  Its preparation has reached an advanced stage.  The 2nd action has only reached the close of pleadings in February this year.  There are also interlocutory applications by the defendants in the 2nd action for striking out and security for costs.  If the two actions are tried together, the trial of the 1st action will be delayed substantially.

40. Mr Cheuk also submitted that if there would be further delay of the trial of the 1st action, the PY group will have more time to perpetrate their secret scheme to take over the Project.  Mr Cheuk suggested that the way forward of the 2nd action should only be decided after the result of the 1st action is known.  If Dennis Chan should be successful in the 1st action, he will not need to proceed with the 2nd action.

41. Mr Cheuk also submitted that there is no claim against Tom Lau in the 1st action and there is therefore no common issue as against him in both actions.  Mr Cheuk further submitted that there is no need for Tom Lau to be legally represented at the 1st trial as there are already three teams of lawyers acting for the PY companies. Tom Lau will also have his voice heard in the 1st action as a witness.

Analyses and decisions on the 2nd summons

42. I think the potential delay is the key issue.  I have already mentioned that the directions for expert witness in the 1st action will only be dealt with in coming June.  It is therefore unlikely for the 1st action to be tried this year or even within the 1st quarter of next year.  Apart from the claim against Tom Lau, the issues in the 2nd action are mainly repetitions of those in the 1st action.  Since the preparation of the 1st action, save expert evidence and the 2nd TP proceedings, has been more or less completed, not much time will be needed to prepare for the same issues in the 2nd action.

43. Regarding the claims against Tom Lau, they involve a relatively narrow compass and are all factual.  The preparation for them should not be very time consuming.

44. In the premises, I am not convinced that to have the two actions tried together will result in delay of the trial of the first.

45. Regarding the submission that Dennis Chan may not proceed with the 2nd action if he should succeed in the first, I think this submission cannot stop Tom Lau from insisting to proceed with his defence in the 2nd action with a view to clear himself of the claims.

46. Regarding the number of teams of lawyers to represent the PY companies and Tom Lau, this is irrelevant on whether Tom Lau should be allowed to take part in the battle for his own credibility.

Order on the 2nd summons

47. I therefore make an order in both actions that they be tried together.  I again for the sake of prudence grant a liberty to apply to sever the trials of the two actions in case later events show that the preparation for the 2nd action will delay of the trial of the 1st action.

Costs orders nisi

48. I also make the following costs orders nisi. I order that the summons by the defendants in the 1st action to lift the stay of the 2nd TP proceedings be in the cause save that the costs of PYI in seeking to have the 2nd TP proceedings be tried together with the main action be paid by the defendants in the 1st action to PYI to be summarily assessed if not agreed.

49. I also order that the costs of Tom Lau’s summons in the 2nd action be in the cause save that the costs of Tom Lau in arguing for the summons and the costs of the solicitors for the 1st to 3rd defendants in the 2nd action in attending to the argument be paid by the plaintiffs in the 2nd action to be summarily assessed if not agreed.

50. For summary assessments of costs, the bills of costs should be filed outside the next 14 days but within the next 28 days.  Objections should be filed within the next 14 days.  A 9:30 am hearing should be fixed for the summary assessments.