OAKSHORSE FARM CORPORATION v. YAU FOOK PING

HCA425/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.425 OF 2002

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J U D G M E N T

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1. The plaintiff is suing for the balance of the purchase price of the horse “Mr Basketball”.  The defendant’s entire counterclaim for breach of the agreement for sale and purchase and on misrepresentation has been abandoned at the trial.

Background

2. The plaintiff is a horse farm in Ocala, Florida, USA.  Mr Thomas Liang is a director of the plaintiff and is a renowned bloodstock agent in Hong Kong and a licensed trainer in Florida. 

3. The defendant is a member of the Hong Kong Jockey Club (“Jockey Club”).  He was introduced to the plaintiff through a mutual friend to buy a horse.

4. On 21 August 1998, the plaintiff and the defendant entered into a Bill of Sale for the horse “Deerhill” at the price of HK$1,000,000 (“the Contract”).  The material terms of the Contract are as follows :

“A first instalment of HK$300,000 together with any and all stake engagements (sic.)which the said horse may be nominated to, are payable upon signing of this bill of sale.

A second instalment of HK$700,000 is to be paid to the Oaks Horse Farm Corp at a date which is acceptable to both parties.

Full mortality insurance of HK$1,000,000 must be placed on the said horse effective immediately, the Oaks Horse Farm Corporation will be listed as first loss payee for the amount of the remaining balance of the unpaid instalment(s) up until the above instalments are paid in full.

It is hereby agreed that the horse will be under the care of Mr Patrick Biancone’s stable, changing of stable is subject to the acceptance of the Oaks Horse Farm Corp.”

5. Both parties agreed that the written term as to the second instalment did not reflect the oral agreement.  However, they differed as to what the term actually was.

6. Deerhill arrived in Hong Kong in about November 1998.  It was placed in the stable of Mr Biancone. 

7. Under the Rules of Racing of the Jockey Club, a “griffin” is a privately purchased or subscription horse imported unraced to Hong Kong.  Deerhill was a griffin.

8. Under paragraph 56(iv)(a) of the Instructions by the Stewards of the Jockey Club, a subscription or privately purchased griffin is required to pass a barrier trial (i.e. starting at the gate) before it can be entered for any race, and to pass a second barrier trial before it can be declared to run.  By August 1999, Deerhill has not been able to pass the barrier trial. 

9. With effect from 1 July 1999, the Jockey Club allowed owners of horses which have not been raced more than twice in their first twelve months in Hong Kong to apply for a voluntary retirement of their horses and to import another.  The owners are required to export the original horses at their own costs, unless such horses are certified by the Club’s veterinary surgeons being too ill to travel and have to be humanely put down.

10. Mr Liang agreed with the defendant to exchange Deerhill for another horse “Mr Basketball”.  On 10 September 1999, Deerhill was retired from racing, and certified by the veterinary surgeon to be fit for export, and later exported to Queensland, Australia.  The veterinary surgeon’s findings of its flat feet and low heel formation were stated to be unlikely to prejudice its future performance.

11. The central issue is upon what terms Deerhill was exchanged for Mr Basketball, to wit, whether the balance of the purchase price of HK$700,000 was payable.

12. After export from Hong Kong, Deerhill raced quite well in Australia.  As at July 2004, it had 10 wins out of 46 starts, winning prize money (for the first five places) of A$172,375 (about HK$1,000,000).  The respective experts for both parties agreed that the factor of prize money between Hong Kong and Australia should be 5 to 1.

13. Mr Basketball did well in Hong Kong.  As at January 2005, it had 3 wins out of 48 starts, and prize money (for the first five places) of about HK$2,880,000.

Plaintiff’s case

14. The plaintiff’s pleaded case is that the Contract was orally varied by consent between Mr Liang and the defendant by substituting Mr Basketball for Deerhill, with the HK$300,000 deposit previously paid for Deerhill applied towards the deposit for Mr Basketball, and the balance of the purchase price should be paid later, out of 50% of the future earnings of the horse, and the balance, if any, on the horse’s retirement.

15. Mr Liang said that the defendant wanted to buy a good horse but did not have enough money.  He offered the defendant instalment terms : the defendant would pay 30% first and the 70% should be paid when the horse would win in the future.  The defendant would pay 50% of the price money won by Deerhill, and retain 50% to upkeep the horse, until HK$700,000 were paid up.  Mr Liang thought from his experience and assessment that Deerhill would have no problem winning enough prize money in one to two years.  However, the defendant feared that the Jockey Club might suspect there was some sort of joint ownership or an under table price.  Hence, the actual arrangement was not spelt out in the Contract.  Mr Liang said he did not know much English, and he gave instructions to his secretary to type out the term “HK$700,000 is to be paid at a date which is acceptable to both parties”.  This was the first time such a term was used.  In the past, he had used such term as the second instalment is to be paid within five days of the first win.

16. It is noted that under Rule 42(ii) of the Rules of Racing of the Jockey Club :

“Where a horse is sold with contingencies, leased or is the subject of any other joint arrangement, a document stating the names and addresses of all the parties interested shall be signed and lodged as above and shall state fully the terms of such sale with contingencies, lease or other arrangement whereupon the sale with contingencies, lease or other arrangement shall be deemed to be registered unless thereafter the Stewards of the Jockey Club refuse to accept the registration.  No party to a lease shall assign his interest in the same without the consent of all other parties to it.”

17. Mr Liang said this was a grey area but he himself was not worried about it.  Only the defendant was worried about it.  The plaintiff’s expert witness, Mr Philip Johnston, sometime Chief Stipendiary Steward of the Jockey Club, said that this rule was basically ignored in 1998.  It was only enforced more vigorously later.

18. Mr Liang said that the term that Deerhill was to be placed in Mr Biancone’s stable was because the full price was not yet paid, the defendant and him were concerned about the progress of the horse.  The plaintiff wished to protect its financial interest.  But the final decision on the stable rested with the defendant.  The mortality insurance was an added protection.

19. Mr Liang said it was normal though not frequent that a horse might not pass the barrier trial.  It was unrelated to pedigree or physical condition.  Mr Johnston said it might be due to the difficulty in acclimatization to Hong Kong conditions.  Mr Liang said he had never given any guarantee that Deerhill would pass the barrier trial.  He only said Deerhill would stay the distance of the Derby (i.e. long distance) race. 

20. Mr Liang said the defendant said he wanted to exchange Deerhill for another horse as he did not know how long Deerhill would take to pass the barrier trial.  Mr Liang said he had a horse as good as Deerhill.  He told the defendant that the terms for the new horse would be the same as Deerhill, the HK$300,000 paid would be treated as the first instalment for the new horse, and all the terms for Deerhill were to continue.  Mr Liang agreed to exchange the horse as a friendly gesture.  Mr Liang also agreed to reimburse the defendant the costs of exporting Deerhill as a friendly gesture.  That is why there was no written contract for the new horse.  He never told the defendant there was no need to pay for the balance of HK$700,000.  The defendant never said he wanted to claim compensation the costs of keeping Deerhill.  If the defendant had mentioned claiming compensation, he would not have agreed to the exchange. 

21. Mr Basketball arrived in Hong Kong in around August 1999.  Mr Biancone had already left Hong Kong.  Mr Liang introduced the defendant to trainer Mr Oughton and Mr Basketball was placed with Mr Oughton’s stable.

22. As to insurance, Mr Liang said Mr Basketball should be insured as per the terms of Deerhill.  However, he only found out now that Mr Basketball was not insured as he considered it the defendant’s responsibility and he trusted the defendant with it.

23. On 26 February 2000, Mr Basketball came third in its first race.  At the end of March, the defendant rang Mr Liang and offered to pay him.  Mr Liang said as the prize money were relative small then, it would be better to wait until a larger sum had accumulated.  For the 1999/2000 season, Mr Basketball had won prize money of HK$152,010.

24. For the 2000/2001 season, Mr Basketball did not do well, winning only HK$34,200.  On 6 August 2001, the defendant transferred Mr Basketball to the stable of Mr Brian Kan without Mr Liang’s consent.  Mr Liang said he was disappointed but he never complained to the defendant.

25. For the 2001/2002 season, Mr Basketball did well.  On 21 October 2001, it came first and won HK$399,000.  At the end of October, Mr Liang rang the defendant and asked him to pay half of the winnings towards the second instalment.  The defendant refused to pay as he had spent a lot of money in upkeeping Mr Basketball.  He said Mr Liang could sue him.  Mr Liang was upset as he had trusted the defendant as a friend. 

26. On 11 February 2002, the plaintiff instructed solicitors to write a demand letter to the defendant.  The letter stated that as at that stage, the price money won amounted to HK$1,162,710, and as such, the plaintiff was entitled to HK$581,355 (i.e. 50%).

Defence case

27.  The pleaded defence case on the oral agreement for the second instalment for Deerhill is that the HK$700,000 was only to be paid subject to Deerhill winning any prize money and out of such prize money, and the defendant was not liable to pay the balance of the HK$700,000 save and except the amount of prize money won.

28. The pleaded defence case on the oral agreement on Mr Basketball is that the plaintiff would give Mr Basketball to the defendant in satisfaction and in full and final settlement of the defendant’s request for compensation for his expenses in maintaining Deerhill due to Deerhill being unable to participate in any races in Hong Kong.  The plaintiff also agreed to the full and final settlement in order to cover up the false representations made by Mr Liang about Deerhill. 

29. The false representations were :

(i) Deerhill would be able to race in the Hong Kong Derby 1999/2000 and/or other races on receiving proper training;

(ii) Deerhill is of good pedigree;

(iii) HK$1,000,000 was the “right” price for Deerhill; and

(iv) the defendant would only have to make the initial payment of HK$300,000 and the balance of HK$100,000 would only be payable from Deerhill’s prize money.

30. The defendant originally counterclaimed damages for breach of the Contract and/or misrepresentation (fraudulent, negligent or otherwise) but the entire counterclaim had been abandoned.

31. The defendant said he met Mr Liang in September 1997.  He told Mr Liang his budget was HK$500,000 but Mr Liang told him only horses of value of HK$1,000,000 would have good result.  Mr Liang showed him video of horses and pointed out a horse.  The defendant said he had to think about it if the price were HK$1,000,000.

32. In August 1998, Mr Liang rang the defendant and said the horse was arriving in Hong Kong.  The defendant thought he should abide by the agreement and he went to Mr Liang’s office to sign the Contract.  He asked Mr Liang how the horse was worth HK$1,000,000.  Mr Liang said he could pay 50% first and the rest could be paid out of prize money and that was the best guarantee for the horse’s value.  Mr Liang said in order to protect his interest, the horse must be trained by Mr Biancone and there would be no change of stable until the balance of the price was fully paid.  The defendant said he would only pay HK$300,000 first and Mr Liang said he had great confidence that the balance would be paid by prize money.  The defendant accepted it but asked whether it was alright to sign it that way, because he valued his membership with the Jockey Club.  However, he never thought of any contravention of the rules of the Jockey Club. 

33. The defendant said Mr Liang never mentioned 50% of the prize money would be used to pay off the balance, and 50% would be kept by the defendant to upkeep the horse, and Mr Liang never mentioned that any balance should be paid up in any event upon retirement. 

34. The Contract was signed a few days later.  Mr Liang explained the Contract to him in Chinese.  Mr Liang said the price was HK$1,000,000, and HK$300,000 was the first instalment.  The defendant asked why the term on the second instalment was written as “on a date acceptable to both parties”.  Mr Liang just said “if the horse wins, you pay”.  The defendant asked why was that not written down.  Mr Liang said “if you win a race, you pay.  If the horse does not win, you will not accept the payment date.  That means you do not have to pay.  That is written in the contract. ”  The defendant accepted it since he thought it was said so clearly.  The defendant later added in his evidence that Mr Liang said if he won the first place, he paid, and there was no mention of second or third place.

35. Deerhill did not pass the barrier trial and the defendant had reflected it many times to Mr Liang.  By July 1999, he told Mr Liang that said he had paid HK$300,000 for the price, another HK$300,000 on the upkeep of the horse, also transport fees, and had spent time and effort on Deerhill, and yet it could not race, and he was not going to play the game anymore.  He asked Mr Liang to refund the deposit paid and compensate him.  Mr Liang was in low spirit and said he would consider compensation. 

36. On about 10 September 1999, Mr Liang rang the defendant, and said he would not compensate in cash, but would only compensate with a horse.  The defendant said Mr Liang had better compensate in cash, since if the second horse would not enter the gate, he would suffer loss.  Mr Liang replied “I repay you with a horse, and that will be the end of the matter.  We do not pursue each other.”  The defendant said he never requested any exchange.  But as Mr Liang was only to compensate with a horse but not money, and if he wanted the money back he had to sue Mr Liang.  He accepted the exchange because he wanted to avoid trouble and end the matter peacefully.  Mr Liang never mentioned payment of the balance for Deerhill because he had taken it back.

37. The defendant said when the horse arrived, he would be told which stable to take the horse from.  There was no designated stable and it would be wholly his decision at which stable the horse was to be trained.  Later, Mr Liang introduced Mr Oughton to him and he thought Mr Oughton was fine.

38. The defendant never rang Mr Liang in March 2001 to offer to pay part of the prize money.  After Mr Basketball came first twice in October 2001, Mr Liang rang and asked for payment of HK$700,000 immediately.  He told Mr Liang he did not owe him any money.

Assessment of the evidence

39. The main issue is what was the oral agreement reached between Mr Liang and the defendant when Deerhill was exchanged for Mr Basketball in 1999.  Since the plaintiff’s case is that the terms for Mr Basketball were to follow those for Deerhill, and the terms for Deerhill admittedly contained an oral agreement as to the payment of the second instalment of HK$700,000, a sub-issue is what was this oral agreement.  In fact, Mr Chain, counsel for the defendant’s main criticism on Mr Liang’s credibility was levied against his evidence on the oral agreement for Deerhill.

40. Mr Chain submitted that although both Deerhill and Mr Basketball raced well subsequently, the relevant time for assessing the parties’ minds was in September 1999, before those results were known.  No doubt this is true for the defendant, because he did not have confidence in Deerhill, and admittedly he hardly had any knowledge of Mr Basketball.  But as to Mr Liang, he had asserted that both Deerhill and Mr Basketball were equally good horses.  He was supposed to have knowledge on the matter at the material time, and the only issue is one of his credibility.  Suffice it to say that the subsequent performance of both Deerhill and Mr Basketball were at least not inconsistent with Mr Liang’s assertion that they were both good horses.

41. Much has been canvassed on the value of Deerhill, at a time when the counterclaim on misrepresentation was on foot.  Deerhill was entered at the Ocala Breeders’ two year old auction in April 1998, but was withdrawn before bidding.  The defence expert Mr Willy Leung, sometime International Races Co-ordinator Manager of the Jockey Club and currently bloodstock agent, said that the Ocala Breeders’ sales were less prestigious than say, Keeneland, Kentucky.  He said the prices for two year old at Ocala Breeders were highest at the February auctions and getting progressively lower for the following months.  The average price for the February sales was US$120,000, and for April was US$22,000.  Hence Mr Leung concluded that the value of Deerhill was much under HK$1,000,000.  Mr Leung conceded that he had never seen the confirmation of Deerhill, an important factor in valuing a horse apart from its pedigree, and he had never attended any auction in the United States.  Mr Johnston who had seen the photographs of Deerhill considered that HK$1,000,000 was a reasonable price taking into account its breeding, confirmation and prices of unraced American horses for the Hong Kong market.  With respect, I prefer the evidence of Mr Johnston to Mr Leung.  Although Mr Liang could not say why Deerhill was withdrawn from the auction, I am not prepared to draw the suggested inference that it was for reasons other than for wrong entrance in the particular price category. 

42. The failure to pass the barrier trial does not indicate whether the horse is or is not a good horse.  Even the defendant accepted that the barrier trial had nothing to do with a horse’s pedigree, and normally, the chance of a horse refusing to enter the barrier gate is slim.  He also accepted that it is part of the risk of owning a horse. 

43. With such background observations, I shall consider the evidence of the parties.

44. Mr Chua, SC for the plaintiff submitted that normally speaking, when goods unpaid for are exchanged for others, it is natural to expect the exchanged goods to be paid for as opposed to be for free.  The defendant said he demanded Mr Liang to refund and/or compensate him.  Normally speaking, one is only prepared to settle in order to avoid liability.  The defendant accepted that the chance of a horse not passing the barrier trial is the risk of owning a horse.  It would be extremely difficult if not impossible for him to make any claim for compensation.  As such, it would be unlikely for Mr Liang to agree to exchange Mr Basketball on the basis of the parties not pursuing each other.

45. Prima facie, Mr Chua’s submission is not unreasonable.  However, this is not a case that can simply be decided on the inherent probabilities of the parties’ cases.

46. Mr Chain submitted that Mr Liang could not be relied on for the oral agreement on the second instalment for Deerhill, and that in turn would affect his credibility on the oral agreement for the continuation of those terms for Mr Basketball.

47. Mr Chain pointed out that Mr Liang’s evidence of payment by 50% of the prize money and full payment in any event upon Deerhill’s retirement were seriously flawed. 

48. Mr Liang originally said that the balance second instalment of HK$700,000 was to be paid out of 50% of the prize money.  Later, he was asked to clarify whether prize money meant the gross sum as declared by the Jockey Club, or net of the prize money payable to the trainer and the jockey therefrom, and he said the net amount.  However, in the letter dated 11 January 2002, his solicitors demanded the payment of 50% of the accumulated gross prize money.  His explanation on this discrepancy was communication problem with the solicitors.  Mr Chain submitted that there was no room for mistake on such an important issue.

49. On the other hand, the defendant’s evidence on this point was also far from satisfactory.  The pleaded defence, the defendant’s witness statement as well as his evidence-in-chief was that the balance of HK$700,000 would only be payable out of Deerhill’s prize money.  However, in cross-examination, the defendant said Mr Liang told him if the horse won the first position and not the second or third, he would pay.  Asked why there was such discrepancy, the defendant said his concept was that should the horse won the first position, he would pay the money.  When put to him that it was a recent invention, he said he considered himself a victim as he bought a thing and it could not even meet the basic requirement.

50. Mr Chain also submitted that the term of full payment upon retirement was an invention to avoid the difficulty about sale with contingency.

51. Mr Liang’s evidence on this point was wavering.  He originally said the payment term was 50% of the prize money would be for the upkeep of the horse, and 50% for payment of the second instalment until full payment and nothing else.  He later added that even if the prize money were not enough, the defendant still had to pay up.  When cross-examined as to whether there were any deadline for payment, he initially said no deadline since he had every confidence of full payment from prize money in two or three years’ time, then he said he could not be sure, and eventually he said the deadline was when the horse was sold.  He said he could not recall whether there was any agreement of payment upon retirement, but later added that it was discussed on one occasion before signing that there should be full payment latest upon retirement.  Mr Chain submitted that if full payment were actually agreed, there would be no reason why such term were not added to the end of “at a date which is acceptable to both parties”.  Mr Liang’s explanation was that it simply did not occur to him.

52. Both Mr Liang and the defendant were very circumspect about the rule on contingency sale.  Both of them agreed that it was a grey area.  Mr Liang said only the defendant was worried about it but not himself notwithstanding he was also a member of the Jockey Club.  The defendant said he never thought of such rule but somehow he was concerned as he valued his membership.  Quite obviously, they were both concerned about it.  Mr Liang must have been somewhat concerned if he was prepared to accept a term for the second payment expressed in such a way when read literally, it was disadvantageous to the plaintiff in that the defendant could refuse to agree a date for payment.

53. Mr Chain pointed out that no insurance was taken out by the defendant on Mr Basketball, which pointed to Mr Basketball being free from any continuing agreement on the same terms of Deerhill.  However, it should be noted that likewise, no insurance was taken out on Deerhill notwithstanding that it was stipulated in the Contract.

54. The defendant’s evidence on the point of insurance was self contradictory.  He first said that he had asked Mr Liang to take out the insurance for him on Deerhill and he would reimburse Mr Liang for it, and he only knew now that no insurance was taken out.  He then said that Mr Liang had told him that insurance had been taken out and he had to make reimbursement when the policy was issued.  Later, he said there was no mention who had to pay the premium.  Yet later, he said he thought the premium was included in the purchase price, which was changed to he wondered whether insurance was included in the price.  Mr Chua made serious criticism on the defendant’s credibility out of this.

55. Mr Chain submitted that Mr Basketball was exchanged in an off hand manner.  There was not even any viewing of the video.  It pointed to Mr Basketball was being offered on a take it or leave it basis, and as the defendant said, notwithstanding what happened to Deerhill, he had no choice but to trust Mr Liang.  On the other hand, if after his experience with Deerhill, the defendant no longer had trust in Mr Liang, then how could he be sure that the new horse would be no worse and that he would not be pouring good money after bad in its upkeep?  It might suggest that he still trusted Mr Liang and there was no break down in the relationship between the parties as would otherwise be if there were really any threats to claim compensation.

56. Mr Chain pointed out that the change of stable from Mr Oughton to Mr Kan without Mr Liang’s consent also pointed to Mr Basketball was being from any continuing agreement.  On the other hand, Mr Chua submitted that the defendant’ evidence that Mr Liang had told him that Deerhill was dangerous and almost had to be retired as a steward was nearly stepped to death by it in the stable was never mentioned it in his statement nor supported by Deerhill’s record, and it was a recent invention and exaggeration by the defendant.

57. Mr Chain submitted that Mr Liang’s evidence that the defendant offered to pay him in March 2000 and yet there was a 180 degrees change in October 2001 when the defendant refused to pay when the prize money had accumulated.  It was submitted that it was just a convenient excuse for Mr Liang’s inaction since Mr Basketball’s first win.

58. The defendant admitted that Mr Liang had not really given him any guarantee except in the payment term that “if the horse wins, you pay”.  Mr Chua submitted that it was not surprising that the counterclaim on misrepresentation was abandoned.  Also, the defendant had said that horses auctioned by the Jockey Club had already passed the barrier trial but upon cross-examination, yet he conceded that he had no such knowledge.

59. Mr Chain submitted that in the event the court rejects Mr Liang’s evidence on the term of payment for the second instalment for Deerhill but accepts his evidence on the continuation of the terms for Deerhill on Mr Basketball, the court cannot establish the payment terms in reliance on the defendant’s own version.  Mr Chain submitted that the court cannot find an agreement on part of the terms advanced by the plaintiff and on part of the terms advanced by the defendant.  Mr Chain referred to Ha Wai t/a Wai Yip Import and Export Trading (HK) Company v. Sanyei Corporation Hong Kong Limited [1987] HKCU 56.  There the plaintiff pleaded the original contract and the variations, and the defendant admitted the original contract but pleaded mutual termination of the contract.  The trial judge rejection the variations alleged on the one hand and the defendant’s evidence on the other hand.  The claim was dismissed.  On appeal, counsel for the plaintiff/appellant argued that the judge having rejected the variations suggested by both parties, the original contract remained standing and judgment ought to have been given accordingly.  Cons VP observed that :

“As a commentary in law that ground of appeal seems undoubtedly correct.  But it is based on a situation that just did not exist.  Each of us on this Bench has observed during the course of argument this morning that the plaintiff’s claim was based, and based solely, upon the contract as varied.  There was no alternative claim for judgment on the original contract.”

60. Mr Chain submitted that the plaintiff never pleaded an alternative case based on the defendant’s version of payment term on the second instalment for Deerhill.  If such were the basis of the plaintiff’s claim, the defendant might have raised a defence based on illegality (in the contractual sense) on the rule on contingency sale.

61. I agree with Mr Chain.  In any event, I am not going to peruse such a course under apprehension by Mr Chain as I find neither Mr Liang nor the defendant reliable in their evidence.  Both counsel accepted that the truth in the matter did not lie only in the dichotomy of  whether the parties agreed that all the terms of the original contract were to follow upon the exchange, or whether both parties agreed not to pursue against each other upon the exchange.  There is a third possibility that they simply had not applied their minds to it and had not reached agreement one way or the other.  This is not inconsistent with the lack of a written contract for Mr Basketball either way.  The third scenario is not a pleaded case of either party and the trial never investigated into such a scenario.

62. In the circumstances, the plaintiff’s claim is dismissed.  But since the defendant did not win by reason of his case being accepted by the court, and also taking into account the abandonment of the counterclaim, I shall made an order nisi that each party should bear its own costs.

63. I thank Mr Chua and Mr Chain for the thorough approach in their conduct of the case.