MACRO CHARM LTD v. PHOENIX LUMBER NICARAGUA S.A. AND OTHERS

HCA 484/2012

[2022] HKCFI 1822

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 484 OF 2012

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JUDGMENT

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Introduction

1.  The North Atlantic Autonomous Region (R.A.A.N.) of Nicaragua is the largest territory in such country, comprising a large jungle that goes from the mountain and valleys of the Northern and Central region to the coast of the Caribbean Sea. It is a sparsely populated region, including old indigenous communities, with diverse habitat, including rain forests, pine forests, deltas, swamps and beaches. In 2007, Hurricane Felix hit such region and forest areas were destroyed. As a consequence, logging operations by timber operators were permitted to commence in such areas to extract timber affected by Hurricane Felix subject to local regulations.

2.  The agreement that is the subject matter of these proceedings relates to an opportunity to participate in such logging operations in Nicaragua.

The Parties

3.  The Plaintiff is an investment company incorporated in the British Virgin Islands. The Plaintiff pleads that its principal place of business is in Hong Kong, but the 3^rd Defendant denies that and avers that any business of the Plaintiff was at all material times conducted in Nicaragua and not Hong Kong. It appears, however, that nothing turns on this.

4.  The 1^st and 2^nd Defendants are private companies incorporated in Nicaragua.

5.  The 3^rd Defendant is an individual and his role and position is disputed. The Plaintiff asserts that at all material times he was or held himself out as a director, and he was a shareholder, of the 2^nd Defendant; and that he made representations pre-contract and post-contract prior to completion of the terms of the agreement upon which reliance was placed by the Plaintiff. The 3^rd Defendant pleads that he believed himself to be a director and shareholder of the 2^nd Defendant from about November 2008, and that in or about July or August 2010 he had been appointed as a director of the 1^st Defendant; but that in or about September 2010 he was informed that he had not been validly appointed as a director of the 1^st and 2^nd Defendants and nor had any shareholding in the 2^nd Defendant been allotted to him. The 3^rd Defendant also pleads that the Plaintiff was aware of the same on or about 11 October 2010 and in any event on 6 December 2010 that he was not a shareholder of the 2^nd Defendant, as a list of such shareholders was produced as part of a due diligence report for the Plaintiff and he was not listed. As explained below, the representations as pleaded and reliance are denied, as is the extent to which the 1^st and 2^nd Defendants were represented by the 3^rd Defendant.

Interlocutory Judgment – 1^st and 2^nd Defendants

6.  As the 1^st and 2^nd Defendants gave no intention to defend, interlocutory judgment with damages to be assessed was entered against them on 23 May 2012.

7.  The Plaintiff has indicated that, as

(i)  following the interlocutory judgment the Action has proceeded against other defendants; and

(ii)  pursuant to Order 37 rule 3, unless the Court otherwise orders and in this case it has not done so, the damages shall be assessed at the trial;

        it will confine itself to seeking damages as pleaded at paragraph 31 of the Statement of Claim, namely damages under the Misrepresentation Ordinance (Cap. 284) as particularized at paragraph 28(i) and (ii) of the Statement of Claim being the sum of US$10 million paid to the 1^st and 2^nd Defendants pursuant to the Agreement (as defined below), and consequential losses.

8.  Such consequential losses are the expenses incurred in the sum of US$1,740,363.07 as at 31 January 2012, (covering site visits, due diligence, obtaining legal opinions, and setting up an office and recruiting staff in Nicaragua; the details of which were set out in Schedule 1 to the Statement of Claim), and including expenses incurred in leasing office space and staff quarters.

9.  In closing, through Counsel, the Plaintiff submitted that it had placed satisfactory evidence before the Court to prove consequential loss in the sum of US$584,193.25 up to 23 March 2012, being the date of the Writ of Summons in this Action, and it invited the Court to assess quantum against all the 1^st, 2^nd and 3^rd Defendants in the principal sum of US$10,584,193.25.

10.  In light of such invitation by the Plaintiff, the Court shall address below the claim for damages against the 1^st and 2^nd Defendants in the sum of US$10,000,000 under paragraph 28(i) of the Statement of Claim and consequential losses in the sum of US$584,193.25 under paragraph 28(ii) of the Statement of Claim.

The Plaintiff’s Case

11.  At a meeting that was held at the Hong Kong offices of The Maxdo Group on 8 March 2010 (the “March 2010 Meeting”), at which Mr William West, Mr Christian West and the 3^rd Defendant represented the 1^st and 2^nd Defendants, such representatives made a presentation to the officers of The Maxdo Group, being the Chairman Mr Chung Hon Dak, Mr Edmund Kwan (“Mr Kwan”) and Mr Andrew Fyfe (“Mr Fyfe”), in respect of an opportunity to invest in logging operations in Nicaragua.

12.  The Plaintiff was incorporated by The Maxdo Group for the purpose of entering into the Agreement, (as defined below), and the Plaintiff’s directors at the material time included Mr Kwan and Mr Fyfe.

13.  On 19 August 2010, the Plaintiff as buyer entered into an Asset Purchase and Sale Agreement with the 1^st and 2^nd Defendants as sellers (the “Agreement”).

14.  Clause 2.1 of the Agreement provides, inter alia, as follows:

“Upon the terms and subject to the conditions of this Agreement, and in reliance on the Sellers representations, warranties and covenants set forth in this Agreement, Buyer agrees to purchase from the Sellers for the Purchase Price set forth below on the Closing Date the Sale Assets and Sellers will sell, convey, transfer, deliver and assign to Buyer, all rights, title and interest in and to the Sale Assets free from Encumbrances. …”

15.  Clause 1.12 of the Agreement provides:

“1.12 ‘Sale Assets’ shall mean: (i) the hurricane affected forests in the Specified Area; and (ii) the Forestry Rights under the Extraction Contracts in respect of the Specified Area; (iii) the Know-How”

16.  Clause 1.4 of the Agreement provides:

“1.4 “Encumbrance” shall mean any pledge, charge, lien, mortgage, debenture, hypothecation, security interest, easement, restriction, pre-emption right, option and any other encumbrance or third party right or claim of any kind.”

17.  The term “Specified Area” is defined in the Recitals to the Agreement as bearing the following meaning:

“WHEREAS Sellers have entered into an agreement with 10 Communities in June 2010 (hereinafter “Initial Extraction Contract”) pursuant to which Sellers will acquire from indigenous landowners the hurricane affected forests together with lumber extraction and transport rights in respect of an area of about 150,000 hectares (“Specified Area”) out of a total area of 339,900 hectares in the R.A.A.N. region of Nicaragua.”

18.  It is the Plaintiff’s case that it had, following completion envisaged under the Agreement and payment of USD10 million by it to the 1^st and 2^nd Defendants, discovered that the 10 communities did not have title to 339,900 hectares of forest land and instead only had title to around 31,958 hectares of forest land. As such, the exploitation area which the Plaintiff had received that was valid for extraction was substantially less than the area the Plaintiff claims it was entitled to and paid USD10 million for under the Agreement; less than 1/10 of the Specified Area. Hence, the bringing of these proceedings in which the Plaintiff seeks redress from all of the Defendants on a number of different bases.

19.  As against the 3^rd Defendant, the Plaintiff’s case is premised on fraudulent misrepresentation and the relief sought in the Statement of Claim endorsed on the Writ of Summons, dated 23 March 2012, included damages or restitution; an account for any part of the USD10 million received by him and all profits therefrom; all necessary orders, accounts and enquiries; and interest and, if awarded in the Court’s equitable jurisdiction, compounded. However, at trial the Plaintiff elected not to pursue an order for account or compound interest against the 3^rd Defendant.

20.  In essence, the Plaintiff asserts that it had been drawn into a speculative deal by representations, upon which it relied, to acquire title to land that it could exploit, but such title was based upon ancestral or communal titles, which were subject to challenge as they were not and as they needed to be as from 2003 onwards, titles determined by the National Committee on Demarcation and Titling (“CONADETI”). Further, notwithstanding the efforts of the Defendants to make good on the land title over time, they failed and hence, did not fulfil the Agreement and that in particular, the 3^rd Defendant knew of the land title problem from, at least, 14 July 2010, but the Plaintiff was not so informed.

The Plaintiff’s Pleaded Claim

21.  Paragraphs 8 and 9 of the Statement of Claim plead that at the March 2010 Meeting William West and/or the 3^rd Defendant made six representations, inter alia, by reference to a presentation package (the “Presentation Package”) distributed to The Maxdo Group’s representatives who attended. The three material representations are defined at paragraphs 8(iii) to (v) of the Statement of Claim as the “Land Representation”, the “Volume Representation” and the “Profit Representation” (set out below).

(1)  The Land Representation is in the following terms:

“In addition to the said 45,000 hectares of Hurricane Felix affected land over which the 1^st and 2^nd Defendants had been conducting their own operation, the 1^st and 2^nd Defendants also had the legal title and extraction rights to, and could sell to The Maxdo Group Limited and assist The Maxdo Group Limited to manage the extraction, milling and sales of lumber from, 100,000 hectares of similar Hurricane Felix affected land in Nicaragua”.

(2)  The Volume Representation is in the following terms:

“It was conservatively forecasted that the 100,000 hectares would contain 3,000,000m³ of lumber”.

(3)  The Profit Representation is in the following terms:

“It was estimated that the said volume of lumber could be extracted over 5 to 7 years and produce profits of over USD500 million”.

22.  In the Plaintiff’s Answers to Request for Further and Better Particulars of the Statement of Claim in relation to paragraphs 8 and 9 of the Statement of Claim, it is averred that the Land Representation, the Volume Representation and the Profit Representation were made in writing in or alternatively, impliedly by various passages in the Presentation Package and an oral presentation given to the Plaintiff by the 3^rd Defendant along with William West and Christian West based on the Presentation Package.

23.  Paragraph 10 of the Statement of Claim pleads that further negotiations took place between The Maxdo Group and the 1^st and 2^nd Defendants from March to August 2010 and that during that period the 3^rd Defendant repeated, adopted and/or ratified the Land Representation, the Volume Representation and the Profit Representation on various occasions. In addition, the 3^rd Defendant further represented, on behalf of the 1^st and 2^nd Defendants, “that the forest area available for sale had increased from 100,000 hectares to 150,000 hectares” (the “Further Land Representation”) (collectively with the Land Representation, the Volume Representation and the Profit Representation, defined as the “Pre-Contract Representations”).

24.  In the Plaintiff’s Answers to Request for Further and Better Particulars of the Statement of Claim in relation to paragraph 10 of the Statement of Claim, it is the Plaintiff’s case that the 3^rd Defendant had repeated the Pre-Contract Representations during further negotiations between The Maxdo Group and the 1^st and 2^nd Defendants between March and August 2010 and in particular:

(1)  in email communications exchanged between the Plaintiff and the 3^rd Defendant as part of the negotiations of a term sheet/memorandum of agreement and the Agreement;

(2)  during a site visit to Nicaragua by the Plaintiff from 26 April 2010 to 6 May 2010, which the 3^rd Defendant attended together with Mr Fyfe; and

(3)  during visits by the 3^rd Defendant to the Plaintiff’s office in Hong Kong on various occasions, including 31 May 2010 to 2 June 2010 and 19 August 2010 to 20 August 2010.

25.  Paragraph 13 of the Statement of Claim pleads that the Plaintiff entered into the Agreement in reliance upon the Pre-Contract Representations and made a USD1 million deposit payment to the 1^st and 2^nd Defendants.

26.  Paragraph 20 of the Statement of Claim pleads that prior to the completion date stipulated in the Agreement, (namely, 20 December 2010), the 3^rd Defendant made four further representations (together the “Pre­Completion Representations”) in the following terms:

(1)  After site inspections and taking inventory of the available lumber on the land, there was expected to be significantly in excess of 2,000,000m³ of lumber.

(2)  All title issues of the relevant plots of land had been resolved with the land authorities.

(3)  The 3^rd Defendant had checked the inventory reports for the areas covered by PAF 1875 and PAF 3750[1].

(4)  When the 1^st Defendant signed the contract with the 10 communities, it had checked the register in Nicaragua and confirmed that there were no other contracts over the land, that the 10 communities were the rightful owners of the land and that the 150,000 hectares chosen by the Plaintiff was contained in that land.

27.  Paragraph 21 of the Statement of Claim pleads that in reliance on the Pre-Completion Representations and continuing to rely upon the Pre-Contract Representations, the Plaintiff proceeded with completion under the Agreement, which took place on around 22 December 2010 in Nicaragua, and paid to the 1^st and 2^nd Defendants the balance of the purchase consideration of USD10 million (i.e. USD9 million in light of the deposit).

28.  Paragraph 23 of the Statement of Claim pleads the falsity of the Land Representation and the Further Land Representation, in terms that after completion, the Plaintiff discovered that the 10 communities did not have title to 339,900 hectares of forest land and instead, only had title to around 31,958 hectares of forest land. In the Plaintiff’s Answers to Request for Further and Better Particulars of the Statement of Claim in relation to paragraph 23 of the Statement of Claim, the Plaintiff pleads that it discovered the title issue in around middle of 2011 through its Nicaragua forest team and it had obtained three documents which evidenced the title issues, namely:

(1)  A certificate issued by Mr Melvin Miranda, the secretary of SERENA-GRAAN [a body that oversees the extraction of authorised lumber], dated 19 August 2011;

(2)  A confirmation issued by CONADETI dated 2 December 2011; and

(3)  An Executive Summary prepared by CONADETI dated 31 March 2011.

29.  The Plaintiff submits that the falsity of the Land Representation and the Further Land Representation is the cornerstone on which the falsity of the other representations is premised and referenced paragraphs 25 and 26 of the Statement of Claim, where it is averred that the Volume Representation, the Profit Representation and the Pre­Completion Representations were necessarily false by reason of the falsity of the Land Representation and the Further Land Representation.

30.  Paragraph 27 of the Statement of Claim pleads that the Pre-Contract Representations and the Pre-Completion Representation were false and made fraudulently by the Defendants and that the false representations were made:

(a)  knowingly,

(b)  without belief in their truth, or

(c)  recklessly, careless whether they be true or false.

31.  In the Plaintiff’s Answers to Request for Further and Better Particulars of the Statement of Claim in relation to paragraph 27 of the Statement of Claim, it is averred that based on the information available at the Public Registry and recognized by CONADETI, the 10 communities only had title to land of a total area of around 31,958 hectares, (based upon land defined therein as Property number 404 comprising an estimated area of 21,058 hectares plus a second piece of land defined therein as Property number 402 comprising an estimated area of 10,900 hectares), which was far less than the total area of 339,900 hectares (as referred to in the recital to the Agreement which defined the Specified Area) out of which the Plaintiff selected the Specified Area of 150,000 hectares that was the subject of the Agreement; and repeated the plea that if the Land Representation was false, it follows that the Volume Representation, the Profit Representation and the Pre-Completion Representations were also necessarily false.

32.  Paragraph 28 of the Statement of Claim pleads the three heads of loss and damage caused by the fraudulent misrepresentations, as already identified. As stated, the Plaintiff does not pursue relief in respect of the head claiming the profit the Plaintiff might have made on an alternative investment by deploying the USD10 million paid to the 1^st and 2^nd Defendants.

The 3^rd Defendant’s Pleaded Case

33.  The 3^rd Defendant, as noted above, pleads (paragraph 4(c) of the Defence of the 3^rd Defendant dated 14 May 2013, and in this section a reference to a paragraph number is to that paragraph in such Defence) that through Mr Fyfe, the Plaintiff was aware as from around 11 October 2010 that he was neither a director of the 1^st Defendant nor a director or shareholder of the 2^nd Defendant. He also pleads (paragraph 5) that Plaintiff dealt with other named individuals of the management team and/or directors and shareholders of the 1^st and 2^nd Defendants and that he was not privy to all (or even most) of those dealings.

34.  The 3^rd Defendant admits that he attended the March 2010 Meeting on, he pleads (paragraph 7), the invitation of William West and that was the 3^rd Defendant’s first contact with The Maxdo Group. The 3^rd Defendant avers that the meeting was introductory, admits the presentation was made and that copies of such presentation were given to the attendees and that he with William West spoke to the presentation (paragraph 9).

35.  It is further pleaded that The Maxdo Group caused its own independent investigation to be conducted thereafter; that a memorandum of agreement was entered into on or about 29 March 2010 (paragraphs 10 and 12); and that between the entering into of that memorandum of agreement and the Agreement, The Maxdo Group’s independent investigation included site visits, surveys, discussion with regulators, assessment of supporting infrastructure, financial modeling and other due diligence (paragraphs 14 and 15); which led to the Agreement being signed on or about 19 August 2010 with The Maxdo Group having satisfied itself as to its investigations and the 3^rd Defendant signing under a mistaken belief that he was a director of the 2^nd Defendant (paragraphs 15 and 16). The 2^nd Defendant’s execution of the Agreement was ratified by a board resolution dated 6 October 2011 and hence, nothing turns on the 3^rd Defendant’s execution of the Agreement (paragraph 17).

36.  Reliance on the terms of the Agreement is pleaded (paragraphs 15 and 18 through 22) and in particular, that between execution and the “Closing Date” of 20 December 2010 the conditions precedent (as set out in Clause 17 of the Agreement) were to be “fulfilled to the Buyer’s satisfaction” and if not so done by 19 December 2010, the Plaintiff could have terminated the Agreement. Further, the details of the representations and warranties set out in Clause 15 of the Agreement are detailed and in particular, it is stated (paragraph 21(e)) that:

“(e) Completion was subject to the fulfilment prior to the Closing Date of certain conditions precedent, including:

(i) That each and every representation, acknowledgement and warranty made in the Agreement was true and correct in all respects and not misleading on the Closing Date: Clause 17(c);

(ii) Completion of the Due Diligence Review by the Plaintiff to its satisfaction: Clause 17(d);

(iii) “Due Diligence Review” was defined as “the due diligence investigations by the Buyer on the Sellers, Sale Assets and the Project including but not limited to legal, financial, technical, environmental and commercial due diligence”: Clause 1.3;

(iv) The 1^st and 2^nd Defendants’ completion of all the tasks and actions as more particularly specified in Clause 9.5 of the Agreement: Clause 17(e);

(v) All regulatory, governmental approvals and corporate actions or filings with relevant authorities which were necessary or desirable for the transfer or assignment of the Sale Assets from the 1^st and 2^nd Defendants to the Plaintiff having been obtained or made: Clause 17(f).”

37.  The 3^rd Defendant disputes that the Pre-Completion Representations arise on a proper reading of the relevant e-mails relied upon by the Plaintiff and avers that the Plaintiff undertook and relied upon its own due diligence, investigation and assessment, conducted over months, before proceeding with completion; and that such due diligence included obtaining legal due diligence from the Nicaraguan law firm Munguia Vidaurre Zuniga (“MVZ”), which it instructed, that inter alia confirmed that the 10 communities had valid legal title to the Specified Area (paragraph 24) and further (paragraph 24(12)):

“(12) Having confirmed the 10 Communities valid legal title to the Specified Area, MVZ completed its Due Diligence Report and signed the same, which it provided to the Plaintiff on 21 December 2010. The Due Diligence Report stated that:

(A) The 10 Communities held valid legal title to the 339,900 hectares at the Land Titles Office;

(B) The 10 Communities were lawful owners of the forest land and had “full power and authority to give” (the Plaintiff’s subsidiary, International Forestry Nicaragua or “IFN”) “IFN the concession of the Utility of the Forest”;

(C) PAF 1875 and PAF 3750 were in the correct form and that “all relevant legal requirements necessary for the transaction contemplated In the Formal Extraction Contract [had been] duly obtained or received” (sic);

(D) IFN had acquired “good and clean title to the concession of the Forest” and the “legal and lawful right to log, cut, exploit and transport the forestry resources in respect of the specified area”.”

38.  The 3^rd Defendant places reliance on a Deed of Confirmation entered into between the Plaintiff and the 1^st Defendant on or about 16 December 2010 (the “Deed of Confirmation”), which he was not a party to. In the Deed of Confirmation, it was set out that rather than taking an assignment of the Sale Assets from the 1^st and 2^nd Defendants, the Plaintiff was to enter into a 10 Communities Extraction Contract directly with the 10 communities; and that such contract was entered into with the 10 communities between 12 and 18 December 2010 (paragraph 27).

39.  As to the pleaded representations, the 3^rd Defendant denies that the Plaintiff was induced to enter the Agreement by them: that reliance was placed by the Plaintiff on them; that they were false; and avers that all statements made by the 3^rd Defendant were true and accurate at the time they were made, and to the extent such statements were expression of opinions, those opinions were genuinely and reasonably held (paragraph 28 through 35).

40.  The essence of the 3^rd Defendant’s position is encapsulated in paragraph 45 as follows:

“45. Ultimately, this was a speculative forestry project that failed, despite months of investigation, and nearly a year of apparent operations, by the Maxdo Group and the Plaintiff. The fact is that the Plaintiff failed to commence its own Harvesting Implementation Plan or put itself in a position in which it could commence harvesting lumber and thus paying fees and royalties to the 10 Communities. [The 3^rd Defendant] had no role to play in those failures by the Plaintiff. The Plaintiff is now impermissibly attempting to shift the loss resulting from its failed management of that project by making tenuous allegations of misrepresentation against [the 3^rd Defendant], who is not a party to any of the agreements entered into by the Plaintiff, and who played no part in the management and operation of the project.”

The Plaintiff’s Reply

41.  The essence of the Plaintiff’s Reply to the 3^rd Defendant’s Defence dated 25 June 2013 is that the Plaintiff’s own due diligence did not preclude its reliance on the Pre-Contract Representations and Pre-Completion Representations; that CONADETI was the proper authority over land titles; that none of the documents referred to by MVZ in its due diligence report had the effect of confirming that the 10 communities had good title to the Specified Area; and that as a matter of Nicaraguan Law (paragraph 6 of such Reply):

“(i) Public Deed No. 56 did not confirm that the 10 communities had valid legal title over an area of 339,900 hectares of hurricane affected forest as pleaded by the 3^rd Defendant. It was by Public Deed No. 63 “Rectification of area and coordinates” issued on or around 17 July 2007, that the size of the property of 10,900 hectares owned by the 10 [c]ommunities was increased to 339,000 hectares, but the relevant Nicaragua legal formalities necessary for the increment had never been completed, as it was necessary to obtain a judicial resolution in order to effect the increment, but no such judicial resolution has ever been obtained.

(ii) In any event, Public Deed No. 63 was cancelled by the public registrar on or around 8 April 2008, well before the making of the Pre-Contract Representations and the Pre-Completion Representations.”

42.  As regards the Deed of Confirmation, by paragraph 7 of such Reply, the Plaintiff accepts the change to it receiving the assignment of land direct from the 10 communities, but avers that the transaction remained a sale and purchase transaction between it and the 1^st and 2^nd Defendants.

The Issues for Determination

43.  In light of the pleaded issues, the Plaintiff raised the following issues as requiring the Court’s determination:

“(1) What was the role of Dua in the dealings with the Plaintiff in respect of the Nicaraguan timbering project?

(2) Whether Dua had made, repeated or adopted the Pre-Contract and Pre-Completion Representations?

(3) If the Pre-Contract and Pre-Completion Representations were made, repeated or adopted by Dua:

(a) what was the proper construction of the Pre-Contract and Pre-Completion Representations?

(b) whether the Pre-Contract and Pre-Completion Representations were false?

(c) whether the Plaintiff relied on the Pre-Contract and Pre-Completion Representations in entering into the Agreement and proceeding to completion under the Agreement in the light of the Contractual Warranties, the due diligence exercise carried out by the Plaintiff and the execution of the Deed?

(4) If the Pre-Contract and Pre-Completion Representations were made, repeated or adopted by Dua and were false, whether they were made, repeated or adopted by Dua fraudulently (knowingly, without belief in their truth or recklessly, careless whether they be true or false)?

(5) If liability were established, whether the false Pre-Contract and Pre-Completion [Representations] caused the Plaintiff to suffer loss and damage and if so what is their proper assessment?

(6) Whether the Plaintiff had failed to mitigate its loss?

(7) Whether the issue of reflective loss arise in the present case?”

44.  Whereas the 3^rd Defendant considered that the following issues required examination:

“(1) Did Mr Dua make the Pre-Contract and Pre-Completion Representations?

(2) If he did, were the Land and Further Land Representations false?

(3) If they were false, did Mr Dua make them fraudulently?

(4) If they were fraudulent, did they induce the Plaintiff?

(5) If so, what loss and damage did the Plaintiff suffer as a result?”

The Evidence

45.  In additional to the documents placed before the Court, the following witnesses gave evidence as to facts:

(1)  Kwan Wing Cheung Edmund for the Plaintiff, as the sole director of the Plaintiff at the time of the trial. As accepted by the Plaintiff in its closing submissions, Mr Kwan was on a number of occasions unable to recall events with precision. It was also accepted that the documents established that that was because the details of the transaction were handled by other colleagues. In light of the entirely of his evidence, I find Mr Kwan not to be an evasive witness, but there was much he was asked about that he could not recall or answer with any certainty. Hence, I find that he is not an untruthful witness, but his evidence was of little assistance to the Plaintiff in establishing its case. Indeed, in this regard, with respect to the reliance placed on the representations pleaded as made by the 3^rd Defendant as against that placed on the due diligence carried out by MVZ, it was only in re-examination that he clarified that in addition to the due diligence by MVZ, reliance was also placed on representations by the 3^rd Defendant. I did not find such evidence convincing.

(2)  the 3^rd Defendant. I found the 3^rd Defendant to be a careful witness who pondered on how to respond to questions put to him (particularly in cross examination) before answering. He was at times defensive (although mindful of the allegations of fraudulent misrepresentation and falsity made against him I find that understandable), and evasive. He also sought to introduce new evidence in explanation of a few matters and some of his evidence contradicted earlier evidence on affidavit. In light of the foregoing, save where the documents or other evidence supports or substantiates his evidence, I do not place reliance on it.

46.  With respect to the above, I have had regard to:

(1)  the following said by Chung J (as he then was) in Star Glory Investment Ltd v Kai Tuo (HK) Technology Co Ltd (HCA 3523/2002, 29 July 2005) at paragraph 12.

“12. The assessment of a witness’s credibility and/or reliability is a task frequently undertaken by the court in litigation (in fact, very often an essential task). I consider the following to be the appropriate test to adopt:-

‘There are two objective tests for assessing a witness’s credibility regarding a matter to which he has testified:-

(a) whether that part of his testimony is inherently plausible or implausible;

(b) whether that part of his testimony is, in a material way, contradicted by other evidence which is undisputed or indisputable (an example often given of such evidence is contemporaneous documents).

Further, where it is shown that a witness has been discredited over one or more matters to which he has testified (using the above tests), this fact is relevant to the assessment of his overall credibility. Likewise, regard may be had to a witness’s motive for deliberately not giving truthful testimony. For example, telling the truth may prejudice his interest, or a just determination of the litigation may affect his interest’.”

(2)  As well the following as said by Kaplan J in Eu Asia Engineering v Wing Hong Contractors Limited (HCCT 16/1990, 23 December 1991) at paragraph 22 in relation to documentary evidence:

“In construction cases, as in most other cases, I attach great significance to the contemporaneous documents. These are usually prepared in good faith before a dispute has arisen or at any rate crystallised. It is a particularly devious contractor, employer or sub-contractor who systematically manufactures documents to assist in a future dispute. Fortunately, such instance are rare. I accept that once a dispute has been identified it is necessary to pay careful attention to the documents created after that time because it is only natural that parties will reflect their grievances and justification for actions taken in those documents. I am quite satisfied that all the contemporaneous documents until just before the crucial events can be relied upon. I will have to look harder at the other documents prepared once the dispute existed.”

47.  With respect to expert evidence on Nicaraguan Law, the Plaintiff produced Mr Roger Perez Grillo and the Defendant produced Frederico A. Gurdian Sacasa to assist the Court. Mr Grillo filed a report dated 27 April 2015 and Mr Sacasa filed a report dated 12 May 2015. The two experts filed a Joint Expert Report dated 7 July 2015. Such expert evidence provided an informative explanation of the legal treatment of indigenous and communal properties in Nicaragua. The explanation included the fundamental rights that are recognised in the Constitution of Nicaraguan (1987 as amended), for the indigenous peoples of the Atlantic coast of Nicaragua, including property rights and forestry rights.

48.  As explained at paragraphs 47 and 48 of such Joint Report:

“47. Rights to natural resources, similar to rights of property, are recognized rights of the indigenous communities under the Constitution. However the indigenous communities need to apply for permits so that they can have an approval of the Government for carrying out activities related to exploitation of natural resources.

48. It is important to clarify that the issue of land title/ownership (property) and the granting of forestry (resources) rights are related because the Constitution recognizes property and forestry rights of the indigenous communities over their territories and resources in their territories.”

The Joint Report then set out the manner in which a permit for forestry exploitation (defined as a “Permiso”) is obtained and in particular, in the R.A.A.N. region, as related to the 10 communities and the manner in which forest trees felled by Hurricane Felix were to be managed.

49.  Four questions were asked of and answered the experts in the Joint Report, which were summarised in a clear and articulate manner by Counsel for the Plaintiff in their written closing as follows:

“(A) The experts have given their respective opinions on four questions. Question l is framed as follows:

“In the event that the court finds that the 3 Defendant had made the representations pleaded at paragraph 8(iii), 10 and 20 of the Statement of Claim, whether the 10 Communities in fact had title to an area of about 150,000 [hectares] out of a total of 339,900 hectares of forest land in the R.A.A.N. region of Nicaragua?”

(B) As to Question I:

(1) this relates to the falsity of the Land and Further Land Representations (and consequently the other representations);

(2) [Mr Grillo] concludes that the 10 Communities did not in fact have good title to the 150,000 hectares of Specified Area out of 339,900 hectares of forest land. [Mr Sacasa] concludes that 10 Communities merely did not have registered title to the same;

(3) the experts agree that no Deed of Title was issued by CONADETI in favour of the 10 Communities in respect of the forest land;

(4) [Mr Sacasa]’s opinion is that the authorities involved in issuing the AVALs^[[2]^] and Permisos were satisfied that the 10 Communities had title to the areas covered by the PAF 1875 and PAF 3750;

(5) the experts agree that the 10 Communities had provided two documents of title as at December 2010. First is Public Deed 63. The experts agree that it is a publically available fact that the Public Registry cancelled registration of the Public Deed 63 on 8 April 2008. Second is Public Deed 56, which appears to be a merger of 3 pieces of land comprising of total area of only around 20,000 hectares (or in the case of the second version of Public Deed 56, 31,000 h[e]ctares);

(6) in fact, the experts agree that the CONADETI Certification dated 2 December 2011 reports that other indigenous communities had already received Deed of Title to a substantial portion of land within the area of around 150,000 hectares of Specified Area which the 10 Communities claimed to have title to. The experts have agreed that holders of Deed of Title to the land may evict any third parties found on their land.

…

(C) Question 2 is framed as follows:

“What is the nature and effect of the Deed of Confirmation dated 16 December 2010 (“Deed of Confirmation”)? Whether, and if so how, the Asset Purchase and Sale Agreement dated 19 August 2010 (“Agreement'') and the PAF referred to in the Agreement were affected by the Deed of Confirmation?”

(D) As to Question 2:

(1) this relates […] to the nature of the Deed;

(2) the experts agree that it was stated in Section 2.02 of the Deed that the Sellers confirmed that all of the representations, acknowledgements and warranties made by the Sellers in the Agreement remained true and correct (the “Representations and Warranties”) and that expressions defined in the Agreement shall have the same meaning when used in the Deed.

(3) [Mr Grillo] is of the opinion that the Deed does not supersede the Agreement, and all the terms of the Agreement would remain valid and in force unless expressly modified by the Deed. [Mr Sacasa] is of the opinion that the Deed superseded the Agreement and that every representation, acknowledgment and warranty of the Agreement remains true and correct at the time of execution of the Deed of Confirmation, as if made again at the date of the [Deed of Confirmation].

…

(E) Question 3 is framed as follows:

“What is the nature and effect of the 10 Communities Extraction Contract dated 16 December 2010 (“10 Communities Extraction Contract”)? What were the Plaintiff's obligations under the 10 Communities Extraction Contract and what were the consequences of breach of those obligations?”

(F) As to Question 3:

(1) This only relates to the question of quantum, whether the Plaintiff had cause[d] its own loss by not carrying out any harvest;

(2) The experts disagree on when harvesting had to commence and how much of the harvesting had to be completed within the 1 year duration of the Permisos. [Mr Sacasa] is of the opinion that since the Permisos were only valid for a year, harvesting should have been completed in a year under the Initial Extraction Contract. [Mr Grillo] is of the opinion that commencement of harvesting could have taken longer than a year, considering the machinery required, construction of the roads, and other relevant aspects of the project and taking into account that the Initial Extraction Contract is for a term of 10 years.

(3) Both experts agree that there were no specific dates on which payment had to be made to the 10 Communities or commencement of harvesting had to commence.

(G) Question 4 is framed as follows:

“What is the nature and effect of the approved PAF 1875 and PAF 3750? What were the Plaintiff's obligations under the PAFs (including the Harvesting Implementation Plan) and what were the consequences of breach of those obligations?”

(H) As to Question 4:

(1) This is a narrow question confined to an examination of the extraction rights covered by the PAFs. It has no bearing on the rest of the 150,000 hectares of the Specified Area;

(2) Both experts agree that if a Permiso has been granted and a dispute as to ownership of territory arises, the person or entity that has been granted the Permiso would be able to continue activities allowed under the Permiso, unless a court order forbids it.

(3) The experts disagree on whether the 10 Communities were legally entitled to grant forestry rights to IFN. [Mr Sacasa] is of the opinion that the 10 Communities then were legally entitled to so grant, as the approval of the PAFs suggests that the 10 Communities had established, at least by March 2011, ownership of the land covered by PAF 1875 and 3750. [Mr Grillo] is of the opinion that if the title is not good, the permit is also not a good permit, since PAFs can only be granted in accordance with good title on the land and for an area within that land.

(4) There is an undisputed SERENA acknowledgment on 19 August 2011 which states that PAF 3750 is located out of the territory of the 10 Communities and overlaps with the AMASAUA WASTINGNI territory. Again, the experts have agreed that holders of Deed of Title to the land may evict any third parties found on their land.”

50.  Hence, the expert evidence as regards question 1 is relevant only if I find that the 3^rd Defendant had made the Pre-Contract Representations (including the Land Representation and Further Land Representation) and the Pre-Completion Representations. With respect to question 2, that is a matter of construction and for the Court to determine if relevant. Question 3 is, I accept, relevant to quantum. Whereas question 4 is relevant to the extraction rights covered by the extraction and reforestation plans named.

Determination of the Issues

51.  Taking the issues as submitted by the Plaintiff and by the 3^rd Defendant that require determination by the Court, I set out my findings below.

52.  With respect to the 3^rd Defendant’s role in the dealings with the Plaintiff in respect of the Nicaraguan timber project as raised by the Plaintiff, I find that based on the evidence of Mr Kwan, when cross examined, that the first dealings between The Maxdo Group and the 3^rd Defendant occurred at the March 2010 Meeting. I accept that whilst the 3^rd Defendant signed the Agreement, by 6 December 2010 at the latest the Plaintiff was aware that he was not a director of the 1^st Defendant and not a director or shareholder of the 2^nd Defendant, which was in advance of the completion date of 20 December 2010 and payment of the balance of the purchase consideration. The 3^rd Defendant clearly had significant dealings with The Maxdo Group’s and the Plaintiff’s representatives. However, I find on the totality of the evidence that William West introduced the investment opportunity to The Maxdo Group and hence, the Plaintiff. This is most evident from the Minutes of the March 2010 Meeting taken by Elaine Wong of The Maxdo Group and dated 8 March 2010 (the “Minutes”), which record William West as the orator and the 3^rd Defendant as being designated to follow up on mattes such as provision of information and an updated term sheet.

53.  With respect to whether the 3^rd Defendant made, repeated, adopted or ratified the Pre-Contract Representations and the Pre-Completion Representations, I find as follows.

54.  It is accepted by both the Plaintiff and the 3^rd Defendant that the statement relied upon must either be made by a person or, if made by another person, is adopted by that person as his own such that he would take on such responsibility as he would have if he were the maker of the statement. Both parties place reliance on John Cartwright, Misrepresentation, Mistake and Non-Disclosure (4^th Edition) at paragraph 13-19.

55.  As noted above in paragraph 21, the Plaintiff’s pleaded case is that the Land Representation, the Volume Representation and the Profit Representation were made by the 3^rd Defendant at the March 2010 Meeting by reference to the Presentation Package.

56.  As also set out above, I have found that Mr Kwan’s recollection of matters was not precise. He did accept in cross examination that the Land Representation was recorded in paragraph 5 of the Minutes and when shown that such paragraph referenced William West as being the speaker, he accepted and did not disagree with the accuracy of such record. On Mr Kwan’s testimony and the Minutes, the Land Representation, at least, was made by William West at the March 2010 Meeting. The Presentation Package does not contain the Land Representation as pleaded. Although it does refer to 100,000 hectares further to the 45,000 hectares being operated by the 1^st and 2^nd Defendants, such reference is in the context of an offer “to manage the extraction, milling and sales of lumber” from such hectares, (see the Executive Summary of the Presentation Package).

57.  The Volume Representation requires the Presentation Package to set out that it was forecast that the 100,000 hectares would contain 3,000,000m³ of lumber, but the Presentation Package only contains a reference to the 45,000 hectares producing an inferred volume of 985,162m³ of lumber. Further, the Minutes record at paragraph 6 that “the total volume of lumbers for the 145,000 ha is about 5 million cubic meter, which could be cut in 5-7 years.” In context, it is apparent that it is likely that such reference came from William West.

58.  The Profit Representation involves the production of profits of over US$5 million in 5-7 years, and the Executive Summary does reference “… will conservatively produce a NPAT of over $500M in 5-7 years.” However, as submitted by the 3^rd Defendant through Counsel in closing, when taken in totality such reference is nothing more than an estimate and dependent on rights over 100,000 hectares being successfully secured first. Upon considering the Presentation Package and the Minutes, I accept such submission and find that such reference is clearly an estimate.

59.  I accordingly find that the Land Representation, the Volume Representation and the Profit Representation as pleaded were not contained in the Presentation Package, were not reflected in the Minutes and were not made by the 3^rd Defendant.

60.  As to whether the 3^rd Defendant repeated, adopted and/or ratified the Land Representation, the Volume Representation and the Profit Representation during the further negotiations referred in paragraph 23 above, through the pleaded means set out in paragraph 24 above, I accept and agree with the submissions of the 3^rd Defendant to the effect that:

(i)  no relevant e-mails have seen identified by the Plaintiff;

(ii)  as Mr Fyfe was not produced to give evidence and Mr Kwan’s evidence as to the site visit from 26 April 2010 to 6 May 2010 was first, hearsay and secondly, in any event insufficient to establish that the 3^rd Defendant was the source of representations set out in Mr Fyfe’s report, reliance cannot be placed on the same; and

(iii)  the bare assertions of Mr Kwan as to the referenced visits by the 3^rd Defendant to the Plaintiff’s office are insufficient;

        in order to establish that the 3^rd Defendant repeated, adopted and/or ratified the Land Representation, the Volume Representation and the Profit Representation. I accordingly find that he did not.

61.  As regards the Further Land Representation, when giving evidence and asked about paragraph 22 of his witness statement, which said that the 3^rd Defendant “informed us that the forest area can be increased from 100,000 to 150,000 hectares.” Mr Kwan said that “us” referred to “our Group” and he could not remember if it was him personally that was so informed. In light of the same, I find that there is insufficient evidence to establish that the Further Land Representation was made, repeated, adopted and/or ratified by the 3^rd Defendant.

62.  I accordingly also find consequent on the above that the Pre-Contract Representations were not made, repeated, adopted and/or ratified by the 3^rd Defendant.

63.  As regards the Pre-Completion Representations set out at paragraph 26 above, the Plaintiff places reliance on the following to establish the 4 representations:

(i)  an e-mail from the 3^rd Defendant to Mr Kwan dated 9 October 2010, which included the statement:

“To date, the results of our lumber inventory have been very positive and we anticipate the final result will significantly exceed 2,000,000m³ of lumber.”

(ii)  an e-mail from the 3^rd Defendant to Mr Fyfe dated 16 November 2010, which included the statement:

“Jonathan also told me that all the title issues have been resolved with the relevant offices etc. so we do have the full 150,000 ha rather than the 120,000 ha. He is also getting all of this documentation together.”

(iii)  an e-mail from the 3^rd Defendant to representatives of IFN and The Maxdo Group dated 29 November 2010 by which the 3^rd Defendant presented that he “had checked the inventory reports for the areas covered by PAF 1875 and PAF 3750” (as per paragraph 20(iii) of the Statement of Claim); and

(iv)  an e-mail from the 3^rd Defendant to a representative of The Maxdo Group dated 15 December 2010, which included the statement:

“Phoenix Lumber Nicaragua S.A will warrant that when it signed the contract with the 10 communities that we checked the register in Nicaragua that no other contract was held of [sic] over the land specified in the contract. (i.e. That there was no liens or encumbrances over the Sale Asset) Also that the 10 communities are the rightful owners of the 340,000ha and thus the 150,000ha chosen by Andy that are contained in the contract...”

64.  The Court’s attention has been drawn by Counsel for the 3^rd Defendant to the proposition that not all misstatements of fact are actionable. Reliance is placed upon John Cartwright, Misrepresentation, Mistake and Non-Disclosure, (4^th Edition) at paragraph 3-12:

“Sometimes it is said that a misrepresentation will not be actionable because it was only a statement of opinion and not a statement of fact; or it was only “sales talk”; or it was not a statement that the defendant had any duty to be careful in making; or it was not reasonable in the circumstances for the claimant to have relied on the statement.”

As well at paragraph 3-14 where the test in differentiating actionable and non-actionable misrepresentations was set out in terms that:

“The circumstances of the contract and its negotiations have to be considered as a whole in order to decide whether the statement is to be regarded as actionable, and the core question is whether the representee was entitled to take the statement seriously and so to rely on it in deciding whether to enter into the contract.

‘In the kind of situation where one expects, as a matter of ordinary common experience, a person to use a certain amount of hyperbole in the description of goods, property or services, the courts will do what any ordinary reasonable man would do, namely, take it with a large pinch of salt. [The test is] whether a reasonable man would take the claim as being a serious claim or not.

De Beers Abrasive Products Ltd v International General Electric Co of New York Ltd [1975] 1 W.L.R. 972 at 978’.”

And by way of illustration, Counsel for the 3^rd Defendant referenced the following at paragraphs 3-14, 3-15 and 3-18:

“If the statement is vague, and not objectively verifiable, it is more likely to be held not to be an actionable statement” (§3-14 on page 34).

“A statement that something, “is likely to occur soon” was not actionable: … its only effect ought to have been to put the Defendant upon making inquiries” (§3-14 on page 34).

“If the statement is made about something on which there is an inherent lack of certainty, and so differing views could be reasonably be held about it, the statement is more likely to be characterised as one of opinion” (§3-15 on pages 35-36).

“A key issue is the balance of information (or access to relevant information) held by the representor and the representee respectively. If the representee has significantly less information than the representor about facts or other circumstances which are relevant to the “opinion” expressed, it is more likely that he will be held entitled to rely on the statement as being more than just an opinion” (§3-18 on page 38).

65.  Additional, it is submitted on behalf of the 3^rd Defendant, and I accept, that the Plaintiff did not have significantly less information in view of the extensive onsite due diligence by Mr Fyfe and others, the engagement of MVZ to verify the 10 communities’ land title and all documents as to title being publicly available from the public registry.

66.  Considering that the Plaintiff bears the burden of proving that there is a sufficient statement or “misrepresentation” and taking the above principles in to account, the 3^rd Defendant submits that in the present case each of the 4 emails relied on for the Pre-Completion Representations are not actionable.

67.  With respect to the representation at paragraph 63(i) above, the email of 9 October 2010 says: “I look forward to seeing [Mr Fyfe] and the team in Nicaragua where they will be verifying the volume of lumber in the area of forest which you are purchasing. To date, the results of our lumber inventory have been very positive and we anticipate the final result will significantly exceed 2,000,000m³ of lumber.” I find such statement to be an opinion about the anticipated volume of lumber and I note the reference to Mr Fyfe and the rest of the Plaintiff’s team in Nicaragua verifying the volume for themselves. I also find that it does not give rise to an actionable representation.

68.  With respect to the representation at paragraph 63(ii) above, I find that the email of 16 November 2010 is not stating that all title issues had been resolved and does not give rise to an actionable representation. Rather, it contains an assertion by the 3^rd Defendant that he had been told that all title issues had been resolved and his evidence, which on this occasion I accept as there was no contrary evidence or justifiable reason to doubt such evidence, was that he had no reason to doubt what he was told.

69.  Further, as submitted by Counsel for the 3^rd Defendant based upon John Cartwright, Misrepresentation, Mistake and Non-Disclosure, (4^th Edition) at paragraph 3-19, where a person is merely passing on information which he believes to be true, he needs to take responsibility for the information passed on in order to be liable for it.

70.  In this regard, the Plaintiff had engaged MVZ to verify the 10 Communities title; in cross examination Mr Kwan accepted that the Plaintiff would not have proceeded to Closing if the Plaintiff did not have and were not satisfied with MVZ’s signed legal opinion; and the 3^rd Defendant was passing on information provided to him, which he believed to be true and would be verified by MVZ. Hence, my finding in paragraph 68 above.

71.  With respect to the representation at paragraph 63(iii) above, the email of 29 November 2010 does say that the 3^rd Defendant had checked the relevant inventory reports, (which were attached to the email), albeit that the 3^rd Defendant qualifies the email by stating that “I think they all reconcile as I have checked the individual worksheets”. There does not appear to me to be any falsity with what is stated in this email in that it does not contain any statement that I find amounts to an actionable representation.

72.  With respect to the representation at paragraph 63(iv) above, the email of 15 December 2010 is said by the 3^rd Defendant to be him discussing the wording of certain representations and warranties that the Plaintiff wanted the 1^st and 2^nd Defendants to give in the Deed of Confirmation. The email states “Therefore, we can provide the following representations and warranties: Phoenix Lumber Nicaragua S.A will warrant …” and “Therefore, could you please urgently draft the above reps and warranties and send to me so I can review.” Indeed, when taken in the full context of the relevant exchange of emails, it is apparent that the parties were merely discussing the proposed wording of the representations and warranties for inclusion in the Deed of Confirmation. I accordingly find that no representation of fact as pleaded by the Plaintiff was being made by the 3^rd Defendant in the email of 15 December 2010.

73.  Returning to the issues identified by the Plaintiff and the 3^rd Defendant for the Court to determine, in light of my finding that the 3^rd Defendant did not make, repeat, adopt and/or ratify:

(i)  the Land Representation, the Volume Representation, the Profit Representation, the Further Land Representation and hence, the Pre-Contract Representations; and

(ii)  the Pre-Completion Representations;

  the issues as to their construction; whether they were false, were fraudulent, were relied upon and caused loss and damage to the Plaintiff; and whether there was mitigation of loss and/or reflective loss; all fall away and do not require determination.

74.  Further, for the reason set out in paragraph 50 above, in light of my findings as stated above, the expert evidence is not relevant.

75.  With respect to the loss in the sum of US$10,584,193.25 claimed by the Plaintiff as set out in paragraph 9 above, I have had regard to the Annex 1 attached to the Plaintiff’s written closing and the supporting documents enclosed to such annex, which I accept substantiate the expenses claimed in the amount of US$584,193.25. I note that the payment by the Plaintiff of US$10,000,000 in total to the 1^st and 2^nd Defendants is admitted. Hence, further to paragraph 10 above, I award damages and consequential loss in the total sum of US$10,584,193.25 to the Plaintiff payable by the 1^st and 2^nd Defendants.

Disposition

76.  The Plaintiff’s claim against the 3^rd Defendant is dismissed.

77.  The Plaintiff is awarded damages and consequential loss in the sum of US$10,584,193.25 payable by the 1^st and 2^nd Defendants. I also award interest thereon from the date of the Writ of Summons to the date of this judgment at HSBC Prime interest rate + 1%, and thereafter at judgment interest rate until date of payment.

78.  I see no reason why costs should not follow the event and make the following costs order nisi:

(i)  the Plaintiff is to pay the 3^rd Defendant costs of this Action, including any reserved costs, as between them, to be taxed if not agreed with certificate for Counsel; and

(ii)  the 1^st and 2^nd Defendants are to pay the Plaintiff the costs of this Action, including any reserved costs and the cost of the assessment of damages and consequential loss, as between the Plaintiff and them, to be taxed if not agreed with certificate for 2 Counsel.

79.  I thank Counsel, the Solicitors and the Interpreter for their assistance.