JIM CHIU YUEN v. C.L. CHOW & MACKSION CHAN (a firm) AND OTHERS

HCA 1113/2017

[2018] HKCFI 215

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1113 OF 2017

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REASONS FOR DECISION

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INTRODUCTION

1.  The 2^nd defendant is a law firm in Hong Kong.  The 3^rd defendant, a practising solicitor in Hong Kong, is a partner of the 2^nd defendant.  Before me was their application to strike out the plaintiff’s claim against them on the sole ground that the plaintiff’s claim is a claim for reflective loss not permitted in law, and thus discloses no reasonable cause of action.  At the end of the hearing, I allowed their application, and ordered that the plaintiff’s Statement of Claim against the 2^nd and 3^rd defendants be struck out and his action against the 2^nd and 3^rd defendants be dismissed, with costs on indemnity basis and certificate for counsel.  These are my reasons.

2.  For the details of the plaintiff’s claim, I refer to paragraphs 2 – 16 of my Decision made on 23 January 2018, where I struck out the plaintiff’s claim against the 1^st defendant.  Suffice for the present purpose to set out the following.

PLAINTIFF’S CLAIM

3.  The plaintiff is a private investor.  According to the plaintiff, since 8 October 2010, each of the plaintiff and his brother-in-law Lo Kin Man (“Lo”) has been the 50% registered shareholder of a BVI company, named Eagle Delta Investments Limited (“Eagle Delta”).  Since 19 October 2010, Eagle Delta has been the 100% registered shareholder of another BVI company, named Castle World Limited (“Castle World”).  The plaintiff alleges that he has since 19 October 2010 been the 100% beneficial owner of Castle World, and that prior to 19 October 2010, his mother-in-law, Madam Pang Wing Kie (“Madam Pang”), was the 100% shareholder of Castle World and used it as her investment vehicle.  The plaintiff further alleges that he acquired Castle World through the acquisition of Eagle Delta.

4.  At all material times, Castle World was and remains the holder of an investment account (the “Account”) with Goldman Sachs (Asia) LLC (“Goldman Sachs Asia”).  Castle World has entered into various derivative contracts connected to underlying securities, indices and commodities with Goldman Sachs International (“Goldman Sachs International”).  The plaintiff pleads in paragraph 5 of the Statement of Claim that “[h]e was at all material times the main operator of the Account”, “in charge of overseeing the investments held in the Account”, ordering transfers, purchases and sales of investments, and so on, and in paragraph 24(g) that he was the “authorised trading agent on behalf of [Castle World]”.

5.  On 4 July 2011, the Independent Commission Against Corruption (“ICAC”) arrested the plaintiff for suspected offences contrary to section 9(1)(a) of the Prevention of Bribery Ordinance (Cap 201) (the “PBO”) and section 25(1) of the Organized and Serious Crimes Ordinance (Cap 455).  On the same day, upon the ICAC’s application in HCCM 49 of 2011, Saw J granted a restraining order (the “Restraining Order”) pursuant to section 14C(1)(a) of the PBO restraining the plaintiff from dealing with monies and investments in the Account save in accordance with the court’s directions.

6.  After the ICAC released the plaintiff, he consulted the 3^rd defendant (then of the 1^st defendant, a law firm). According to the plaintiff, he explained his instructions and concerns over the potentially drastic effect of the Restraining Order, given the volatility of the market.  He expressed his “wish to apply to vary the Restraining Order so that he would be vested with the right to liquidate the investments in the Account” (see paragraph 11(e) of the Statement of Claim) with “unfettered discretion” (see pleaded in paragraph 11(f) of the Statement of Claim), “willing to undertake not to withdraw any of the cash obtained as a result of any liquidation of the investments held in the Account (see paragraph 11(g) of the Statement of Claim).  The ultimate objective is “to preserve the value of [Castle World’s] assets” (see paragraph 11(f) of the Statement of Claim).  The plaintiff retained the 1^st defendant to apply for such variation.  This retainer is referred to as the “D1’s Retainer” in the Statement of Claim.  The plaintiff pleads in paragraph 12 of the Statement of Claim that both of them understood that any variation would have a direct impact on Castle World’s interest in the Account.

7.  In paragraphs 13 and 14 of his Statement of Claim, the plaintiff pleads that the 1^st and 2^nd defendants owed to him an implied duty to provide the service with reasonable care and skill or a like duty of care in tort, with the following particulars:-

“(a) exercise reasonable care and skill in advising [the plaintiff] as to how to best achieve the Objectives [to vary the Restraining Order so that he could have unfettered discretion to realise the investments in the Account].

(b) exercise reasonable care and skill in connection with the application for variation of the Restraining Order so that [the plaintiff] was vested with the right to liquidate the investments [in] the Account.

(c) exercise reasonable care and skill in preparing all relevant documents to best present the case for [the plaintiff] in connection with the applications for variation of the Restraining Order.

(d) exercise reasonable care and skill in obtaining court orders on favourable terms to [the plaintiff] to best achieve the Objectives, in particular enabling [the plaintiff] to dispose of the relevant investments in the Account at any time as he saw fit to maximize realisation.

(e) exercise reasonable care and skill in preparing any draft order so as to cater for the investments in the Account…

(f) advise [the plaintiff] fully and accurately [the plaintiff] of all aspects in connection with the applications for variation of the Restraining Order, including if and when it may be necessary to make further application to the Court to achieve the Objectives.”

8.  On 11 July 2011, the 3^rd defendant prepared a Summons and a supporting affirmation of the plaintiff for the application of the Restraining Order.  On 14 July 2011, Saw J granted an order to vary the Restraining Order (the “1^st Variation Order”).  As a result, the plaintiff was permitted to instruct Goldman Sachs Asia to dispose of the listed securities in the Account.

9.  On or around 28 July 2011, the 3^rd defendant prepared another summons and a supporting affirmation of the plaintiff for another variation.  A draft order was exhibited to this supporting affirmation, but according to the plaintiff, its terms were never explained to him, save and except the advice that the draft order closely resembled the terms of the 1^st Variation Order.  The plaintiff pleads that he reasonably understood this to mean that he would be permitted to instruct Goldman Sachs Asia to terminate and/or liquidate the remaining investments in the Account.

10.  On 29 July 2011, the plaintiff retained the 2^nd defendant in replacement of the 1^st defendant on 29 July 2011.  This retainer is referred to as the “D2’s Retainer” in the Statement of Claim.  The plaintiff pleads that the 2^nd defendant, in replacement of the 1^st defendant, had the same understanding as the 1^st defendant (which is not surprising since it was still the 3^rd defendant being the handling solicitor) and owed the same duties under the D1’s Retainer as pleaded in paragraphs 13 and 14 of the Statement of Claim (set out in paragraph 7 above).  The same understanding consisted of the understanding of the objectives and instructions of the plaintiff, including the understanding that the objective was to preserve the value of the assets of Castle World and that any variation would have a direct impact on Castle World’s interest in the Account.

11.  On 3 August 2011, the court granted the second variation order (the “2^nd Variation Order”).  In essence, the 2^nd Variation Order ordered the plaintiff “do request” Goldman Sachs International to terminate each derivative covered thereunder (the “Derivative”) within 5 trading days from the date of the Order.  In respect of certain other investments in the Account, namely, the Bonds and Note Investment and the Funds (as defined in the Statement of Claim), the plaintiff was permitted to terminate or dispose of certain investments in the Account within 5 trading days exclusive of the date of the 2^nd Variation Order.  The plaintiff pleads in paragraph 21 of the Statement of Claim that upon the grant of the 2^nd Variation Order, the 3^rd defendant advised the plaintiff that the 2^nd Variation Order required that all of the investments covered by it must be disposed of within 5 trading days, or else the plaintiff would be in contempt of court.  The plaintiff further pleads that in reliance upon such advice, he arranged for disposal of the investments covered by the 2^nd Variation Order, which he pleads was premature.

12.  The plaintiff claims that the 1^st, 2^nd and 3^rd defendants were negligent and breached their duties, and that as a result thereof, the plaintiff has suffered loss.  In paragraph 26 of the Statement of Claim, the plaintiff pleads:-

“By reason of the matters aforesaid, [the plaintiff] has suffered loss and damage in being deprived of the opportunities to dispose of the relevant investments at the opportune times, for which the 1^st defendant and/or 2^nd defendant and/or [the 3^rd defendant] are liable.”

13.  The Statement of Claim then pleads the particulars of the loss as being the difference between estimated return on date on which “disposal would have taken place” and “termination amount booked” in the Account.  The alleged loss amounts to US$2,588,368.39 and A$71,780.00.  It is clear from the reading of the Statement of Claim that the loss allegedly suffered by the plaintiff is loss in the value of the investments in the Account, but not any loss in the form of diminution of the value of his beneficial ownership in Castle World.  However, in a striking out application, since amendments may be permissible to salvage an otherwise defective pleading, I am prepared to deal with the present application on the basis that the plaintiff is claiming for the loss of diminution of the value of ownership in Castle World.

OVERVIEW OF PARTIES’ SUBMISSIONS

14.  Ms Sara Tong, counsel for the 2^nd and 3^rd defendants, contended that the plaintiff’s claim plainly and obviously is a claim for reflective loss not permitted in law, and in such circumstances, the claim is liable to be struck out: see Landune International Limited v Chenug Chung Leung [2006] 1 HKLRD 39 (CA) at paragraphs 33-34 per Yuen JA.  In particular, she contended that on the facts pleaded, the 2^nd and 3^rd defendants owed like duties of care to Castle World, and therefore, Castle World has causes of action against the 2^nd and 3^rd defendant.  As a result, any claim by the plaintiff for the loss suffered by Castle World is a claim for reflective loss not permitted in law.  She further submitted that in pleading a claim for reflective loss, the plaintiff has to plead specifically the justifications for allowing a claim for reflective loss otherwise not permitted, failing which the plea is bad and is liable to be struck out.

15.  Mr Lawrence Ng (leading Mr Kaiser Leung) disagreed that it would be appropriate for me to strike out the plaintiff’s claim.  The gist of his submissions was that it is inappropriate in a striking out application to determine the fact-sensitive question of whether the 2^nd and 3^rd defendants owed any duty of care to Castle World, and that in any event, on the facts pleaded, they did not.

PRINCIPLE PROHIBITING CLAIM FOR REFLECTIVE LOSS

16.  The starting point for discussion of the trite legal principle that a claim for reflective loss is not permissible in law is the House of Lords’ decision in Johnson v Gore Wood & Co (a firm) [2002] 2 AC 1.  At 35E-36B, Lord Bingham, giving the lead unanimous judgment of the House of Lords, said:-

“(1) Where a company suffers loss caused by a breach of duty owed to it, only the company may sue in respect of that loss. No action lies at the suit of a shareholder suing in that capacity and no other to make good a diminution in the value of the shareholder's shareholding where that merely reflects the loss suffered by the company. A claim will not lie by a shareholder to make good a loss which would be made good if the company's assets were replenished through action against the party responsible for the loss, even if the company, acting through its constitutional organs, has declined or failed to make good that loss…

(2) Where a company suffers loss but has no cause of action to sue to recover that loss, the shareholder in the company may sue in respect of it (if the shareholder has a cause of action to do so), even though the loss is a diminution in the value of the shareholding…

(3) Where a company suffers loss caused by a breach of duty to it, and a shareholder suffers a loss separate and distinct from that suffered by the company caused by breach of a duty independently owed to the shareholder, each may sue to recover the loss caused to it by breach of the duty owed to it but neither may recover loss caused to the other by breach of the duty owed to that other.” (emphasis added)

17.  This principle prohibiting claim for reflective loss is based on the rationale that there is the need to avoid double recovery and that it is the company’s choice to or not to make a claim: see Waddington Ltd v Chan Chun Hoo (2008) 11 HKCFAR 370 per Lord Millett at paragraph 87; Day v Cook [2002] 1 BCLC 1 (CA) per Arden LJ at paragraph 38; Johnson v Gore Wood & Co (a firm), supra at 66D-E per Lord Millett.  Based on this rationale, this principle applies also to claims made by a plaintiff not in the capacity of its shareholder but also other capacities such as a creditor or an employee: see Gardner v Parker [2004] 2 BCLC 554 (CA) per Neuberger LJ at paragraphs 68-70.  Based on this rationale, the court is not concerned with the likelihood of the company’s claim being successfully pursued, but simply whether the company has any arguable claim: see Perry v Day [2005] 2 BCLC 405 at paragraph 25 per Judge Rich QC; applied by DHCJ Wilson Chan (now Wilson Chan J) in Basab Inc & anor v Superb Glory Holdings Ltd v ors, unreported, HCA 6/2014, 4 December 2014 at paragraph 34.  Based on this rationale, the court has no discretion to disapply this principle: see Johnson v Gore Wood & Co (a firm), supra at 62F-G per Lord Millett.

DUTY OF CARE OWED BY 2^ND AND 3^RD DEFENDANTS TO CASTLE WORLD?

18.  It is immediately clear that to say that the plaintiff’s current claim for reflective loss is bad in law, the 2^nd and 3^rd defendants have to establish plainly and obviously that Castle World has a cause of action against the 2^nd and 3^rd defendants, as required in subparagraph (2) of Lord Bingham’s judgment quoted in paragraph 16 above, for the loss of the investments in question.  The starting point is that a solicitor owes a duty of care to his client only but no duty to any third party: see White v Jones [1995] 2 AC 2017 at 256; First Asia Finance International Ltd v Tso Au Yim & Yeung [2017] 5 HKLRD 746 at paragraph 43, although White v Jones, supra usually is cited as an example that a solicitor may owe a duty of care to a non-client. 

19.  In this regard, Ms Tong submitted that the 2^nd and 3^rd defendants owed a duty of care to Castle World (similar to those owed to the plaintiff as pleaded) in respect of the investments of Castle World.  The following tests are the tests adopted in decided cases to see whether a duty of care should be imposed, broadly stated to be:-

(1)     The test of foreseeability, proximity and what is just and reasonable, usually referred to as the threefold test;

(2)     The test of whether the defendant has assumed responsibility to the third party for the advice given; and

(3)     The test of whether the imposition of duty represented an ordered and incremental development of previous authorities.

See BCCI v Price Waterhouse (No 2) [1998] PNLR 564 (CA) at 583-587 per Sir Brian Neill (with whom Nourse and Brooke LJJ concurred).

20.  It must be borne in mind that “there is no simple formula or touchstone to which recourse can be had in order to provide in every case a ready answer to the questions whether, given certain facts, the law will or will not impose liability… Phrases such as ‘foreseeability’, ‘proximity’, ‘neighbourhood’, ‘just and reasonable’, ‘fairness’, ‘voluntary acceptance of risk’, ‘voluntary assumption of responsibility’ will be found used from time to time in the difference cases.  But…such phrases are not precise definitions.  At best they are but labels or phrases descriptive of the very different factual situations which can exist in particular cases and which must be carefully examined in each case…”: see Caparo v Dickman [1990] 2 AC 605 at 628C-E per Lord Roskill. 

21.  In this regard, Mr Ng submitted that because the factual situations have to “be carefully examined”, it is not appropriate for me to carry out such exercise in a striking out application.  I disagree.  Mr Ng’s submissions were based on a flawed premise that at trial there would be evidence to resolve this question of whether a duty of care was owed by the 2^nd and 3^rd defendants to Castle World.  However, when the relevant facts have not even been pleaded, this question would simply fall outside the scope of factual disputes, and no relevant evidence would be adduced and considered.  At the end of the day, the most the plaintiff could prove would be all the pleaded facts in his pleadings.  This is exactly what I am doing here – to assume every fact pleaded in the Statement of Claim in favour of the plaintiff.

22.  This flawed premise of Mr Ng’s such submissions also reveals the practical reason why it is necessary to plead the facts and matters “with precision and rigour” that would explain, in terms of proposition (2) of Lord Bingham’s judgment in Johnson v Gore Wood & Co (a firm), supra, as set out in paragraph 16 above, why a claim for reflective loss is viable: see East Asia Satellite Television (Holdings) Ltd v New Cotai, unreported, HCA 2189/2009 and HCMP 2218/2009, 16 July 2010 at paragraph 141 per Reyes J, affirmed by the Court of Appeal in [2011] 3 HKLRD 734 at paragraphs 77-80 per Tang ACJHC (with whom Fok and Chu JJA concurred).  The practical reason is this: if there exists a cause of action for the company, then there cannot be any claim for reflective loss, and in order to determine whether there exists such a cause of action, there must be some factual circumstances (for example, explicit saying by the solicitors that they would not be responsible for the company) that would be relevant.  If these factual circumstances are not pleaded at all, the court simply would not be engaged to look at such evidence (even if it would still be adduced) outside the scope of factual disputes as defined by the pleading, and absent any determination of such question, the general principle prohibiting claim for reflective loss, without any circumstances to justify why it should not, would apply.  This pleading requirement of course also has a sound theoretical basis – one has to plead all the elements required for a cause of action.  For example, to ground a cause of action in a breach a contract, one has to plead an agreement and consideration, and the act which constitutes the breach of contract.  In the present case, one of the necessary elements for a viable claim for reflective loss is the justification for disapplication of the principle prohibiting such claim.  Not having pleaded all these elements, in a striking out application, the plaintiff cannot be heard to say that despite the incomplete plea, it is the defendant’s burden to satisfy the court that such unpleaded elements do not in fact exist.  To borrow the words of Tang ACJHC in East Asia Satellite Television (Holdings) Ltd v New Cotai LLC, supra, at paragraph 80, “I do not believe this matter turns on the burden of proof.”  This matter simply is about pleading a complete cause of action.  It also follows any argument should be rejected that these facts and matters could be pleaded in Reply – it is the basic requirement that all the facts and matters necessary for a cause of action should be pleaded in a Statement of Claim.

23.  In any event, Mr Ng submitted that if necessary, he would add a plea that:-

“At all material times, [Castle World] has no cause of action against the 2^nd and 3^rd Defendants because [Castle World] did not have any contract of retainer with the 2^nd and 3^rd Defendants and the 2^nd and 3^rd Defendants did not owe any duty of care in tort to [Castle World].”

24.  I am prepared to consider the present application with this proposed additional plea.  In essence, the only fact pleaded here is that Castle World did not have any retainer with the 2^nd and 3^rd defendants.  The rest of the plea are in fact legal consequences for me to decide.

25.  Having been satisfied that I can “carefully examine” the facts of the Statement of Claim all assumed in favour of the plaintiff, I note that the three tests set out above have overlaps, and no one test is superior to others.  For example, in BCCI v Price Waterhouse (No 2), supra at 587D-588B, Sir Brian Neill (with whom Nourse and Brooke LJJ concurred) set out the same factors for consideration for both the threefold test and the assumption of responsibility test. 

26.  Since the present application is a striking out application, and I should strike out only in plain and obvious case, I shall apply each of the three tests to determine if it is plain and obvious that the 2^nd and 3^rd defendants owed a duty of care to Castle World.

27.  Before the application of the tests, there are some features worthy of note.  First, Castle World, as a corporate, could not act by itself, but had to act through a natural person.  Here, in respect of the investments, it was the plaintiff through whom Castle World acted, because on the Statement of Claim, the plaintiff pleads unequivocally that he was the main operator of the Account (in the name of Castle World) and the authorised trading agent in charge of overseeing the investments held therein.  This is in complete consistency with the plea that the D2’s Retainer was to preserve the value of the assets of Castle World.  Second, the Variation Orders being sought were to authorise the plaintiff to deal with the investments in the Account clearly in the name of Castle World, because the investments were held in in the name of Castle World but not the plaintiff.  Third, while legally speaking, Castle World and the plaintiff are two separate legal entities, practically speaking, in terms of the D2’s Retainer and its objectives, Castle World and the plaintiff were essentially the alter ego of each other.  I must emphasise that the phrase “alter ego” I use here is not used in the sense of piercing the corporate veil in the companies law.  I need not to.  I use this phrase to show the practical reality here vis-à-vis the 2^nd and 3^rd defendants.  In fact, this approach was adopted by the English Court of Appeal in BCCI v Price Waterhouse (No 2), supra.  In that case, where the operation of all the plaintiffs (being separate legal entities) had been conducted as a single unit with little distinction drawn between them, it was held to be arguable that there was sufficient proximity between the auditors and all of the plaintiffs although not all of them were the auditors’ clients.

28.  I should also add that during the hearing, Mr Ng, elaborating on the proposed plea as set out in paragraph 23 above, contended that in the circumstances of the present case, nothing prevented Castle World and 2^nd and 3^rd defendants from entering into any retainer or contract to regulate their relationship, and the fact that there was no such retainer or contract would mean it was at least arguable that the Court would not impose any duty on the 2^nd and 3^rd defendants to Castle World, whichever test I was to apply.  He referred me to Yiu Chown Leung & ors v Chow Wai Lam & anor (2005) 8 HKCFAR 592 and contended that absent any retainer, it was unusual to impose any duty of care, although he rightly did not go so far as to say that the absence of a retainer is conclusive.  I agree that absence of a retainer in the circumstances, though not conclusive, is one of the factors I should consider.  Thus, in applying the tests below, I would flag this up in my consideration, in addition to the three features identified above.

THREEFOLD TEST

29.  Bearing all these in mind, I shall consider the threefold test first.

30.  In BCCI v Price Waterhouse (No 2), supra, at 587D-588B, Sir Brian Neill set out the following factors for consideration in applying the threefold test (as well as the assumption of responsibility test):-

“(a) the precise relationship between (to use convenient terms) the adviser and the advisee. This may be a general relationship or a special relationship which has come into existence for the purpose of a particular transaction… there may be an important difference between the cases where the adviser and the advisee are dealing at arm’s length and cases where they are acting on the same side of the fence.

(b) the precise circumstances in which the advice or information or other material came into existence. Any contract or other relationship with a third party will be relevant.

(c) the precise circumstances in which the advice or information or other material was communicated to the advisee, and for what purpose or purposes, and whether the communication was made by the adviser or by a third party. It will be necessary to consider the purpose or purposes of the communication both as seen by the adviser and as seen by the advisee, and the degree of reliance which the adviser intended or should reasonably have anticipated would be placed on its accuracy by the advisee, and the reliance in fact placed on it.

(d) the presence or absence of other advisers on whom the advisee would or could rely. This factor is analogous to the likelihood of intermediate examination in product liability cases.

(e) the opportunity, if any, given to the adviser to issue a disclaimer.”

31.  I should assess these factors objectively.  For convenience, I shall refer to them as “factor (a)”, “factor (b)”, and so on.

32.  It is plain and obvious that from the three noteworthy features identified in paragraph 27 above, while the retainer in question was pleaded as made between the plaintiff and the 2^nd defendant, the relationship between the plaintiff and Castle World was “on the same side of the fence” (see factor (a)).  There clearly is no conflict between what the plaintiff had to do and the interest of Castle World.  In fact, the plaintiff made it clear that the objective of the applications for variation of the Restraint Order was to preserve the value of Castle World’s assets: see paragraph 11(f) of the Statement of Claim. 

33.  Further, although the 2^nd and 3^rd defendants did not expressly convey any advice to Castle World as such, the advice conveyed to the plaintiff in this context (namely, legal services being sought to preserve the value of assets of Castle World), must be understood to be conveyed to Castle World (as the alter ego) as well (see factor (b)).

34.  Since, according to paragraph 12 of the Statement of Claim, both the plaintiff and the 2^nd and 3^rd defendants “understood that any variation to the Restraining Order would have a direct impact on Castle World’s interests in the Account”, the 2^nd and 3^rd defendants must also have understood in the circumstances that Castle World acting through the plaintiff, in addition to the plaintiff himself, relied upon his advice (see factor (c)).  Given that Castle World acted through the plaintiff, it does not make any sense that Castle World would be able to rely on others’ advice (see factor (d)).

35.  As regards factor (e) whether the 2^nd and 3^rd defendants had any opportunity to issue a disclaimer to Castle World, I cannot see any circumstances pleaded that they were deprived of such an opportunity, even though they were well aware that what they were doing was in relation to the investments held by Castle World in the Account.

36.  It is convenient here to deal with Mr Ng’s elaboration of the proposed additional plea that nothing prevented Castle World and the 2^nd and 3^rd defendants from entering into any retainer or contract.  As the plaintiff and Castle World were the alter ego of each other in the present context, and in the light of the factors pointed out above, it was, in my judgment, on the 2^nd and 3^rd defendants to issue any disclaimer in respect of any liability to Castle World, consistent with this factor (e).  It would be absurd in the light of such foreseeability and close proximity that the 2^nd and 3^rd defendants would be liable only if there was a retainer or some kind of contract.

37.  Besides these factors, I should consider whether it is just and reasonable in the circumstances to impose a duty of care.  In this regard, White v Jones [1995] 2 AC 207 is indicative.

38.  The detailed background of that case need not be rehearsed in detail here.  Suffice to say that the House of Lords there found it appropriate to impose a duty of care on the solicitor to the beneficiaries of the estate of the testator who had instructed the solicitor to prepare a will.  In my judgment, analogy can be drawn between that case and the present case.  First, the property in question belonged to the third party in question, not the client.  In fact, I must say that the present case is a stronger one, in that the investments in question belonged to Castle World at the beginning, while in White v Jones, the assets of the estate would belong to the beneficiaries only upon the testator’s death.  Second, the solicitor in White v Jones clearly knew that what he did would affect the beneficiaries’ interest in the future.  The present case is stronger in the sense that the 2^nd and 3^rd defendants knew that what they did would have a direct impact on the assets of Castle World immediately.  Third, in White v Jones, the beneficiaries would have no recourse after the testator died, if the solicitor owed no duty to them.  In the present case, Castle World would otherwise have no recourse if the plaintiff chose not to sue the 2^nd and 3^rd defendants.  I should also add that there was (of course) no retainer between the solicitor and the beneficiaries, and there was no suggestion that they were prevented from entering into any such retainer.  In the circumstances, as the House of Lords there found it appropriate to impose a duty of care in White v Jones, it is at least equally appropriate, and just and reasonable, to impose a duty of care on the 2^nd and 3^rd defendants to Castle World.   

39.  Thus, by the threefold test there existed a duty of care owed by the 2^nd and 3^rd defendants to Castle World.

TEST OF ASSUMPTION OF RESPONSIBILITY

40.  In in Yiu Chown Leung & ors v Chow Wai Lam & anor, supra at paragraph 7, Chan PJ formulated the test of assumption of responsibility as follows:-

“…even in the absence of a contract, a duty of care arises where (1) party A relies on party B to provide information, advice or services in circumstances where it is reasonable to rely on party B; and (2) party B takes it upon himself to provide such information, advice or services, when he knows or ought to have known that party A is relying on him… In these circumstances, party B is said to have assumed responsibility to exercise care towards party A… It is not necessary to show that party B has knowingly or deliberately assumed such responsibility. The test for the existence of such a duty is an objective one: whether it can reasonably be said that he has by his conduct accepted responsibility.”

41.  In addition, as mentioned above, Sir Brian Neill in BCCI v Price Waterhouse (No 2), supra, mentioned the same factors of the threefold test for the test of assumption of responsibility. 

42.  There seemed to be suggestion, made in reliance on Yiu Chown Leung v Chow Wai Lam, supra, that in the present case, when there was no retainer between Castle World and the 2^nd and 3^rd defendants, there could not be any assumption of responsibility.  I have no hesitation in rejecting such suggestion.  First, if this were the case, there would be no place for White v Jones, supra.  Second, Yiu Chown Leung v Chow Wai Lam, supra in fact does not stand for such bald proposition.  In that case, what the court said, on the cases pleaded and evidence presented, was that because the plaintiff’s primary case that the solicitor was acting for them and looking after their interests was rejected, once this primary case was rejected, it was difficult to say that, objectively, there was any assumption of responsibility.  In fact, the Court of Final Appeal there did not just dismiss the appeal on the ground that there was no retainer.  Instead, the Court of Final Appeal there still analysed the evidence to see whether there was still an impression that the solicitor had assumed responsibility to the plaintiffs (see paragraph 29). 

43.  That said, absence of a retainer still is a consideration.  As I canvassed above, those factors set out in BCCI v Price Waterhouse (No 2), supra, point to an existence of a duty of care owed by the 2^nd and 3^rd defendants to Castle World despite absence of a retainer.  Further, applying the objective test as formulated by Chan PJ in Yiu Chown Leung v Chow Wai Lam, supra, given that the plaintiff and the 2^nd and 3^rd defendants understood that any variation would have a direct impact on Castle World’s interests and that the objective of the retainer between them was to preserve the value of the assets of Castle World, I was satisfied that it is reasonable for Castle World (acting through the plaintiff) to rely on the 2^nd and 3^rd defendants’ advice and services, and objectively speaking, the 2^nd and 3^rd defendants knew or ought to have known that Castle World would rely on their advice and services, and still took it upon themselves to provide the same, without issuing any disclaimer of liability to Castle World. 

44.  In the circumstances, by the test of assumption of responsibility, there also existed a duty of care owed by the 2^nd and 3^rd defendants to Castle World.

TEST OF ORDERED AND INCREMENTAL DEVELOPMENT

45.  Lastly, the test of whether the imposition of duty represented an ordered and incremental development of previous authorities.  For reasons given in paragraphs 37-38 above drawing an analogy between White v Jones and the present case, it is plain and obvious that imposition of a duty of care in the present case would represent an ordered and incremental development of the previous authorities.

CONCLUSION

46.  The three tests were satisfied.  There was no suggestion of other tests I should adopt.  Nor were there any facts and matters pleaded to justify a claim for reflective loss (other than those which Mr Ng would like to add, namely, that there was no retainer between Castle World and the 2^nd and 3^rd defendants: see paragraph 23 above and perhaps the elaboration made by Mr Ng: see paragraph 36 above).  Nor was there any suggestion of any further amendments to the Statement of Claim.  Thus, I was satisfied it is plain and obvious that the 2^nd and 3^rd defendants owed a duty of care to Castle World in respect of the investments of Castle World, and therefore that the principle prohibiting claim for reflective loss applies to bar the plaintiff’s claim.

ROLE OF PRE-APPLICATION CORRESPONDENCE IN O 18 r 19(1)(a)

47.  It remains for me to add that I also considered the pre-application correspondence to see any materials to salvage the Statement of Claim, an approach adopted by Reyes J in Hotung v Hillhead Ltd [2008] 3 HKLRD 200 at paragraphs 46-50.  I saw none.

ORDER

48.  In the circumstances, at the end of the hearing, I ordered that:-

(1) The plaintiff’s Statement of Claim against the 2^nd and 3^rd defendants be struck out on the ground that it disclosed no reasonable cause of action.

(2) The plaintiff’s claim against the 2^nd and 3^rd defendants be dismissed.

COSTS

49.  At the hearing, having heard counsel’s submissions on costs, I ordered that costs of the 2^nd and 3^rd defendants’ application and costs of this action be to the 2^nd and 3^rd defendants, with certificate for counsel, on indemnity basis, to be summarily assessed.  Here are my reasons for ordering costs on indemnity basis.

50.  First, in East Asia Satellite Television (Holdings) Ltd v New Cotai, supra, at paragraph 141, Reyes J took the view that a claim for reflective loss could be struck out “as an abuse of process and an unwarranted waste of time and expense”.  Although the 2^nd and 3^rd defendants did not apply to strike out the plaintiff’s claim on the ground of an abuse of process, in my view, launching such a claim which is plainly and obviously unviable was an abuse of process.  In this regard, I should also emphasise that it is my decision that the matter is plain and obvious, and thus any contention that the application was substantively argued and thus it was not unreasonable for the plaintiff to launch the claim cannot be maintained.

51.  Second, in the pre-application correspondence, at the initial stage, the plaintiff’s solicitors even wrote that Castle World was represented by the 2^nd and 3^rd defendants and that the 2^nd and 3^rd defendants should compensate Castle World.  This clearly shows that at least at the initial stage, the plaintiff also took the position that Castle World had a cause of action against the 2^nd and 3^rd defendants.

52.  Mr Ng said that this was pre-application correspondence only and such position was a mistake.  He referred to subsequent pre-application correspondence which asked the 2^nd and 3^rd defendants to focus on the Statement of Claim.  However, the plaintiff’s correspondence did not traverse the previous position that Castle World had a cause of action.  Instead, the plaintiff’s correspondence gave me an impression that the plaintiff would wish to have the cake and eat it, in that on the one hand, he would like to maintain the Statement of Claim, and on the other hand, he would not wish to say anything in the correspondence which may be taken as waiving any claim available to Castle World.

53.  In the circumstances, I was satisfied that the plaintiff’s claim against the 2^nd and 3^rd defendants was so unreasonable and such an abuse of process that costs on indemnity basis should be ordered.