CHOW HOW YEEN MARGARET AND OTHERS v. WEX PHARMACEUTICALS INC AND ANOTHER

CACV 33/2017

[2018] HKCA 344

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 33 OF 2017

(ON APPEAL FROM HCA NO 537 OF 2013)

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J U D G M E N T

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Hon Lam VP (giving the Judgment of the Court):

1.  In this action, the Plaintiffs claimed damages from the Defendants on account of misrepresentations inducing them to purchase shares of the 1^st Defendant by way of private placement. After the trial, in a judgment handed down on 13 January 2017 Au-Yeung J found the claim established and awarded damages in the sum of CAD 452,055.07, CAD 653,951.76 and CAD 194,400.

2.  There were two misrepresentations which the judge found to be established on the evidence.  The first one, which the judge referred to as the CP Representation was a misrepresentation as to the ownership of a Chinese patent relating to the use of a substance called TTX for treatment of drug withdrawal for opiate addicts.  The judge found that in 2001 it had been represented on behalf of the Defendants to the Plaintiffs that the Chinese patent was owned by a subsidiary of the 1^st Defendant, Nanning Maple Leaf Pharmaceutical Company Limited [“Nanning”].  Whilst Nanning was actually the registered owner of the patent at the time when it was made, it had been engaging in litigation concerning such ownership since 1995.  On 19 March 2000, a court in the PRC held that Nanning was not a qualified applicant for the patent.  An appeal against that judgment was dismissed on 27 November 2001.  On 22 November 2002, the registered ownership of the patent was changed to other persons. Nanning attempted to challenge the change by administrative action in 2003 which was unsuccessful and an appeal in that regard also failed in 2004.  A petition for retrial was dismissed by the Beijing Higher People’s Court in March 2005.

3.  The 1^st Plaintiff was interested in obtaining the distributorship and the right to sell the patented products in Peru.  After negotiations, she agreed to purchase and procured her companies (2^nd and 3^rd Plaintiffs) to purchase shares in the 1^st Defendant.  In exchange, another company of hers (Winland Enterprises Group Inc) would acquire the right to sell the patent products in Peru for free.  The shares were acquired on different dates between 30 November 2001 and 29 October 2004.  Distributorship agreements were made between Winland and a purported subsidiary of the 1^st Defendant, GlobalMed Corp, held out by the Defendants as a company incorporated in Grenada.

4.  Notwithstanding the CP representation, the Defendants did not inform the Plaintiffs of the pending litigation, the court decision of 19 March 2000, the dismissal of the appeal, the change of registered ownership and the unsuccessful administration action.  Though a public announcement on loss of the patent was made by the 1^st Defendant on 29 June 2005, the Plaintiffs failed to notice the same and they were only alerted about the same in April 2010.

5.  With the announcement of the loss of the patent, the price for the shares of the 1^st Defendant dropped significantly and the Plaintiffs suffered loss accordingly.

6.  It was further discovered that there was no company incorporated in Grenada in the name of GlobalMed.  There was a GlobalMed incorporated in Turks & Caicos Islands but it was not a subsidiary of the 1^stDefendant or 2^nd Defendant.  Hence, the distributorship agreements could not have conferred any right to use the patent on Winland.  The Plaintiffs claimed against the Defendants for misrepresenting GlobalMed’s status.  The judge referred to this as the GlobalMed Representation.

7.  The judge found that those representations were made on behalf of the Defendants by the then president and CEO of the Defendants fraudulently.

8.  In a subsequent decision of 5 September 2017, the learned judge awarded interest on judgment rates (both for pre- and post-judgment periods). She also ordered the Defendants to pay indemnity costs and enhanced interest pursuant to Order 22, rule 24 as the Plaintiffs had made a sanctioned offer and they have achieved better outcome after trial.

9.  The Defendants appealed against the judgment and the decision on interest and costs.

10.  We heard the appeal on 3 May 2018 and judgment was reserved.  We now give our judgment.

The notices of appeal

11.  The notice of appeal was prepared by the solicitors for the Defendants and counsel did not sign the same.

12.  It was originally dated 10 February 2017.  It was amended on 16 November 2017 after the decision of 5 September 2017.  The supplemental notice of appeal was also prepared by the solicitors.  It is a document of 20 pages consisting of 23 grounds of appeal.  It is prolix, not well-focused and at places canvassing arguments at great length. 

13.  With respect, the so-called grounds of appeal as set out in the supplemental notice of appeal were more in the nature of submissions as opposed to the setting out of the grounds of appeal in a concise manner.  As such, the drafter of this document failed to pay proper regard to [20] to [22] of Practice Direction 4.1.

14.  As such, we do not find the document to be of much help in assisting the court in understanding the Defendants’ grounds of appeal.  Such a document substantially and unnecessarily increases the time taken for the preparation of the appeal.  In the future, the court will be more proactive in exercising the power under [23] of Practice Direction 4.1 requiring improper notice of appeal to be amended.

15.  The problem of such notice of appeal was compounded by counsel’s tracking these grounds of appeal in the skeleton submissions.  Though Mr Carolan, counsel for the Defendants, tried to assist by grouping some “grounds of appeal” into several substantive arguments, we still found difficulties in working with the first set of submissions.  Pursuant to the direction of the court, another set of submissions was lodged by Mr Carolan.

The appeal against the main judgment

16.  In his skeleton submissions opposing the appeal, Mr Remedios, counsel for the Plaintiffs, summarized the grounds of appeal against the main judgment as follows,

“ (1) The Court below was wrong to find that being induced to enter into the 3 Distribution Agreements (‘DAs’) and the Share Agreement (‘SA’) caused Ps to purchase 680,856 of D1’s Private Placements (‘Shares’). In particular, Ds contend that:-

(a) Ps did not rely on the representation made by Shum to Chow that Ds owned the China Patent via Nanning (‘CP Representation’) in buying the Shares but instead, did so pursuant to the SA; and

(b) The CP Representation was not intended to be relied on and acted upon by Ps in buying the Shares.

(2) The Court below was wrong to find that the GlobalMed Representation is a fraudulent misrepresentation (SNoA §10) (‘GlobalMed Point’).

(3) Ps’ pleadings are inadequate in that it only pleads that the purchase of Shares were made in consideration for the ‘licence free grant of the Peru distribution rights’ and Ps failed to plead a case of reliance on the CP Representation in making their respective investments (SNoA §§1(b)(iii), 4, 5, 6, 8(e) and 9(d)) (‘Pleading Point’)).”

17.  We have cross-checked such summary against Mr Carolan’s revised skeleton submissions, in which counsel set out the Defendants’ arguments in the appeal against the main judgment at paras 1 to 15.  The main thrust of these arguments were directed towards the findings based on the CP representation and the foundation of the arguments was (as we shall explain below), in substance, a pleading point.  Thus, Mr Carolan emphasized that the judgment against the Defendants could not stand based on the pleaded case advanced by the Plaintiffs and the evidence of the 1^st Plaintiff. 

18.  In respect of the GlobalMed representation, Mr Carolan submitted it could only be relevant to the Distribution Agreements.

19.  At the hearing, Mr Carolan took us through at some length the relevant paragraphs in the pleadings and the witness statement of the 1^st Plaintiff to support this part of the appeal.

20.  The crucial averments are at paras 15 to 25 of the Re-re-amended Statement of Claim:

“ 15. From about July 2001 to November 2001, Shum and Grace met with Chow and Ma on numerous occasions at WEX HK’s former office situated at Unit A, 34^th Floor, Manulife Tower, 169 Electric Road, North Point, HK (hereinafter referred to as ‘WEX HK’s Office’) to discuss the terms of a possible grant by WEX of the distribution rights for Tetrodin in Peru to a company nominated by Chow and Ma, and to promote the sale of the Shares.

16. During the course of negotiations, Shum informed Chow and Ma that WEX:

a. was in need of money to continue its clinical studies for the Canadian registration of Tetrodin and Tectin, to expand the Nanning Facility and to pay for the salaries in Nanning.

b. being a high-risk biotechnology company with minimal income, WEX always needed to raise new capital.

17. Shum offered to grant the distribution rights for Tetrodin in Peru to a company nominated by Chow and Ma, in return for investments in WEX by the purchase of the Shares by them and/or companies under their respective control (hereinafter collectively referred to as ‘the Subscribers’).

18. In or about July or August 2001 it was orally agreed between Chow and Ma, and Shum (hereinafter referred to as ‘the Share Agreement’),in WEX HK’s Office, that:

a. The Subscribers would:

i. commence purchasing the Shares only after a distribution agreement for Tetrodin in Peru was entered into;

ii. purchase annually, either singly or collectively, at least 50,000 Shares;

iii. not resell the Shares within 12 months from the date of issue; and

iv. purchase the Shares for investment purposes only and not with a view to resale or distribution.

b. The purchase price of the Shares would be determined by discounting the closing price of WEX’s shares the day before the subscription date.

19. In early August 2001, Chow and Ma orally informed Shum and/or Grace that they nominated Winland to enter into all agreements relating to the exclusive distribution rights of Tetrodin in Peru.

20. Shum and/or Grace orally informed Chow and Ma that WEX nominated Purported GlobalMed, to enter into all agreements relating to the exclusive distribution rights of Tetrodin in Peru.

21. To induce Winland to enter into a distribution agreement with Purported GlobalMed and thereby induce the Subscribers to commence purchasing the Shares pursuant to the Share Agreement,Shum and/or Grace, between July and November 2001, represented to Chow and Ma, and thereby warranted (hereinafter referred to as ‘the Representations’), that:

a. Tetrodin was protected by the China Patent, related intellectual property and knowhow.

b. Nanning owned the China Patent.

c. Nanning would manufacture and supply Tetrodin from the Nanning Facility.

d. WEX owned the exclusive distributor rights for Tetrodin, was in the position to grant the exclusive distributorship for Tetrodin in every country except the PRC, HK and Canada, and was in the position to grant to Winland the distributorship rights for Tetrodin in Peru.

e. Shum was a Director of WEX, WEX HK and Purported GlobalMed, and was authorised by WEX and Purported GlobalMed to sign on their behalf all agreements with Winland.

f. Purported GlobalMed was a wholly owned subsidiary of WEX, incorporated in the WI, whose registered office was at Infinitrust Bank & Trust, 1711, 269 Morne Rouge Road, Grand Anse, St. George, Grenada, WI.

g. Purported GlobalMed had the exclusive distributorships for Tetrodin for every country except the PRC, HK and Canada and was in the position to grant to Winland the exclusive distributorship rights in Peru for Tetrodin manufactured by Nanning at the Nanning Facility, for a period of 6 years commencing from the date of signing the distribution agreement with GlobalMed.

22. To give credence to the Representations and to deceive Chow and Ma into believing that the Representations were and each of them was true, and to induce Winland to enter into a distribution agreement with Purported GlobalMed, and thereby induce the Subscribers to commence purchasing the Shares, Shum and/or Grace between July and November 2001, in WEX HK’s Office, gave to Chow and Ma the following documents:

a. Two of Shum’s business cards, one stating inter alia that Shum was the Chairman of WEX, WEX HK and Nanning, and the other stating inter alia, that Shum was the President and Chief Executive Officer of WEX;

b. Grace’s business card stating that Grace was the Director and Deputy General Manager of WEX HK and Nanning;

c. A copy of the China Patent dated 22^nd January 2000 showing Nanning’s ownership.

d. ‘Business in Vancouver’ magazine article titled ‘Puffer Fish Offers Drug Possibilities for Addicts’ dated March 2001;

e. ‘The Pain Clinic’ magazine article titled ‘Puffer Fish Toxin‑A New Age Analgesic’ dated June 2001;

f. Three Canadian newspaper articles published in 2001 about WEX’s business activities;

g. Three undated WEX’s company leaflets about Tetrodin;

h. An undated Nanning brochure showing Nanning Facility and Tetrodin;

i. A letter from Health Canada to WEX dated 17^th January and 30th August 2001 approving the registration of TTX and the trial for Tetrodin in Canada;

j. Two financial investment reports published in 2001 on WEX;

k. WEX’s 2001 Annual Report providing an overview and CEO’s letter by Shum;

l. WEX’s New Releases published from the years 1998 to 2001 about Tetrodin;

m. A letter dated 24^th September 2001 from WEX HK, signed by Grace on behalf of WEX HK, attention to Chow and Ma, which stated, inter alia, ‘After our lengthy discussion in the past couple of months, we are pleased to provide you with a draft of the Peru Distribution Agreement for your comment. We would like to set up a meeting to discuss the working details with you and also to provide you an update of our recent progress’; and

n. A letter dated 6^th October 2001 from WEX HK, signed by Grace on behalf of WEX HK, addressed to Chow, which stated, inter alia, ‘Thanks for your revised Peru Distribution Agreement received yesterday. I have sent it to our Vancouver Head Office … it will take up some time for our lawyer to review it. I have attached herewith some of our share information for your reference. On the contrary, our share price is quite stable and well performed. In fact, in the face of the world markets we have done very well, and will do even better over the next 12 to 18 months specially if we can open up the Peru market with you. We would be most grateful if you could help us to bring in some new funds.’

23. Acting in reliance on the Representations and in the belief that they were and each of them was true, and induced thereby and not otherwise, Chow and Ma on behalf of Winland, and Shum on behalf of Purported GlobalMed in WEX HK’s Office entered into:

a. A purported Confidentiality Agreement dated 8^th August 2001;

b. A purported Memorandum of Understanding dated 18^th October 2001; and

c. A purported distribution agreement for Tetrodin in Peru with Purported GlobalMed dated 12^th November 2001 (hereinafter referred to as ‘the 1^st Purported GlobalMed Agreement’).

24. The 1^st Purported GlobalMed Agreement provided (hereinafter referred to as ‘the GlobalMed Representations’), inter alia, that:

a. Purported GlobalMed’s ‘registered office is at Infinitrust Bank & Trust, 1711, 269 Morne Rouge Rd., Grand Anse, St. George, Grenada, W.I.” (Clause 1).

b. ‘GlobalMed exclusively distributes, sells, and markets the drug Tetrodin which is protected by patent and related intellectual property and know-how which is owned and manufactured by WEX, Nanning, WEX HK who together are collectively known as ‘The Manufacturer’. GlobalMed has the exclusive distributorships for every country except’ the PRC, HK and Canada (Clause 2.1).

c. Purported GlobalMed grants to Winland the exclusive right to distribute Tetrodin in Peru for the term of the Agreement (Clause 4).

d. In consideration of clause number 2 and all subsequent clausesin this agreement and for other good and valuable consideration the parties hereby agree to be bound by theses premises and obligations that follow (Clause 2.4).

25. Acting in reliance on the Representations and the GlobalMed Representations and in the belief that they were and each of them was true, and induced thereby and not otherwise, the Subscribers, after Winland had entered into the 1^st Purported GlobalMed Agreement on 12^th November 2001, commenced on 30^th November 2001 to purchase the Shares. Between 30^th November 2001 and 29^th October 2004, the Subscribers purchased a total of 830,856 of the Shares.

Particulars

Date Paid	Date Issued	Placee	Certificate Number	Shares Purchased	Unit Price (C$)	Amount Paid (C$)
30-Nov-01	18-Dec-01	Red Robin	Unknown	30,000	2.05	61,500.00
Unknown	18-Dec-01	Asian World	1084	20,000	2.05	41,000.00
Unknown	10-Dec-02	Chow	Unknown	50,000	1.90	95,000.00
Unknown	10-Dec-02	Chow	1478	5,000	1.90	9,500.00
Unknown	14-Feb-03	Chow	1520	10,000	2.04	20,400.00
6-Oct-03	6-Nov-03	GCXL	01708 – 01729	52,500	1.95	102,375.00
23-Oct-03				165,428		322,584.60
Unknown	18-Dec-03	Asian World	1892	20,000	5.00	100,000.00
12-Jan-04	30-Jan-04	Muscular	2103	40,000	5.00	200,000.00
Unknown	30-Jan-04	E-Top	2104	20,000	5.00	100,000.00
9-Sep-04	27-Oct-04	Chow	02501 – 02520	200,000	2.70	540,000.00
29-Oct-04	29-Oct-04	GCXL	2572	217,928	2.30	501,234.40
Total:				830,856		2,093,594.00

                                                                                                                                                                                           ”

21.  The particulars under para 25 covered purchases by entities which are not the Plaintiffs in the action.  As far as the Plaintiffs were concerned, the position was summarized at para 39 as follows: 

“ 39. Acting on the faith and truth of the Representations, GlobalMed Representations, the statements contained in the Letters, the Acro Pharm Representations (hereinafter collectively referred to as ‘All Representations’), and in the belief that they were and each of them was true and induced thereby and not otherwise, the Plaintiffs from 10^th December 2002 to 29^th October 2004 purchased 740,856 Shares for the sum of C$1,791,094.

Particulars

Date Issued	Placee	Shares Purchased	Total Paid (C$)
10 Dec 2002, 14 Feb 2003 and 27 Oct 2004	Chow	265,000	664,900
6 Nov 2003 and 29 Oct 2004	GCXL	435,856	926,194
30 Jan 2004	Muscular	40,000	200,000
Total:		740,856	1,791,094

”

22.  Paras 47 and 48 of the Re-re-amended Statement of Claim are also relevant:

“ 47. WEX and/or WEX HK made:

a. All Representations fraudulently, knowing that they were and each of them was false and untrue, or made them recklessly not caring whether they were true or false, with the intention and motive of inducing Winland to enter into a distribution agreement with Purported GlobalMed and then Acro Pharm in order to induce the Subscribers to purchase and to continue to purchase the Shares pursuant to the Share Agreement by deceiving Chow into believing that:

i. At the time the 2^nd Purported GlobalMed and Acro PharmAgreements were signed, Purported GlobalMed and Acro Pharm could and would perform their obligations under the agreements.

ii. At the dates of the 2^nd Purported GlobalMed Agreement i.e. 5^th December 2001, and the Acro Pharm Agreement i.e. 21^st May 2003, Nanning owned the China Patent.

b. The Public Statements fraudulently, knowing that they were and each of them was false and untrue, or made them recklessly not caring whether they were true or false, with the intention and motive of deliberately concealing the material facts from thePlaintiffs and shareholders, and/or deceiving and/or continuing to deceive the Plaintiffs into believing that:

i. At the time the 2^nd Purported GlobalMed and Acro PharmAgreements were signed, Purported GlobalMed and Acro Pharm could and would perform their obligations under the agreements.

ii. At the dates of the 2^nd Purported GlobalMed Agreement, i.e. 5^th December 2001, and the Acro Pharm Agreement, i.e. 21^st May 2003, Nanning owned the China Patent.

iii. Litigation over the China Patent ownership only commenced after the 1^st and 2^nd Purported GlobalMed Agreements and the Acro Pharm Agreement were entered into and after the Plaintiffs purchased the Shares.

iv. Nanning lost the ownership of the China Patent in April 2005.

v. SIPO changed the bibliographic data, i.e. the name of the registered owner of the China Patent from Nanning to the PLA and Qiu pursuant to the Final Judgment in 2005.

vi. Litigation regarding the China Patent ownership ended early 2005.

Particulars of Knowledge

1. Paragraphs 9(a) and (b) and 10 above are repeated.

2. Shum, being the Legal Representative of Nanning in all proceedings in the PRC relating to the China Patentand International Patent, knew or ought to have known the outcome of all applications and hearings before SIPO, the CFI and the CA.

3. In the letters dated 15^th and 25^th May 2012, Messrs. Baker & McKenzie (hereinafter referred to as ‘B&M’),solicitors for WEX, stated, ‘Our clients have no record of GlobalMed’s incorporation’.

4. Donna’s presentation to WEX’s Board of Directors on 13^th April 2005 summarised the China Patent litigations.

5. Shum reported to WEX’s Board of Directors on 26^th August 2004 matters relating to the loss of the China Patent SIPO’s change of the name of the registered owner of the China Patent from Nanning to the PLA and Qiu; and the reacquiring of the China Patent; and Nanning’s litigation against SIPO.

6. During Jennings Capital due diligence in September 2003, Jennings Capital discovered and informed Donna that the China Patent was not in Nanning’s name.

48. Disclosure, whether collectively or singly, of the matters set out in paragraphs 46 and/or 47 above, would have influenced the conduct of the Subscribers, in that:

a. Chow and Ma on behalf of Winland, would not have entered into the Confidentiality Agreement, the Memorandum of Understanding, the 1^st or 2^nd Purported GlobalMed Agreements,the Acro Pharm Agreement, and the Peruvian Trial Agreement;and

b. The Plaintiffs would not have purchased the Shares pursuant to the Share Agreement or any shares in WEX.”

23.  Mr Carolan placed great emphasis on the plea at para 21 that the representations were made to “induce Winland to enter into a distribution agreement … and thereby induce the Subscribers to commence purchasing the Shares pursuant to the Share Agreement” (emphasis added).

24.  Since the 1^st Plaintiff was, according to the terms of the Share Agreement as pleaded at para 18(a)(ii), only obliged to purchase at least 50,000 shares annually, Mr Carolan submitted that the purchase of shares in addition to the minimum was not induced by representations, or at least not intended by the Defendants when the representations were made.

25.  With due respect, this is a very narrow view of the pleadings which we cannot accept.  The Re-re-amended Statement of Claim should beread as a whole and the context for the purchase of the Shares was pleaded at paras 15 to 17 of the document.  The 1^st Defendant needed money to support its clinical studies and to expand Nanning and support its operation.  The purchase of the Shares was regarded as investment by the Plaintiffs in return for the distribution rights for the patented products in Peru.  Further, as pleaded in para 11(b), the Shares were purchased by private placements, viz placed by the 1^st Defendant to the purchasers instead of acquisition from the market[1].  It was pleaded at paras 25, 34 and 39 that the Plaintiffs purchased the Shares in reliance on such representations.

26.  Though they were pleaded separately as Share Agreement and distribution agreements, the purchase of Shares and the right to use the patent could not be segregated from each other.  In the context of the case as pleaded in the Re-re-amended Statement of Claim, the representation on the ownership of the patent went to the core objective for the Plaintiffs in entering into these transactions. Thus, it was pleaded at para 48 that had disclosure been made of the litigation concerning the Chinese patent and the outcomes of the legal proceedings in the PRC courts, the Plaintiffs would not have purchased the Shares at all.

27.  As the whole point of the Defendants asking the Plaintiffs to invest into the 1^st Defendant was to provide funding support for research on the patented products, it is difficult to see how it can seriously be argued that the representation on ownership of patent was not made with the intention to induce the purchase of the Shares.

28.  Even though the term of the Share Agreement only obliged the 1^st Plaintiff to procure a minimum of 50,000 shares annually, there was no restriction on the quantity of shares to be acquired. There was nothing in the pleadings nor in the evidence to suggest that the Defendants had confined the effect of the representations to the minimum quantity of shares.

29.  Further, at para 31, it was pleaded that the Defendants provided some documents to the 1^st Plaintiff to give credence to the representations “and to induce the Subscribers to continue to purchase the Shares”.

30.  As a matter of pleadings, we are of the view that the Plaintiffs’ case on the Defendants’ intention to induce and reliance has been adequately pleaded.

31.  We are not surprised that the judge treated Mr Carolan’s pleading points dismissively at [40] of the judgment.  It is an obviously bad and hopeless point.

32.  The judge analysed the case of inducement at [83] to [92] of the judgment.  For present purposes, it is sufficient to highlight the findings on the circumstances under which the private placements were offered to the 1^st Plaintiff at [90]:

“ 90. Grace had authority from Mr Shum to convey messages to Ms Chow from time to time, attaching WEX’s share information, toinvite Ms Chow to make private placements. Grace would say that WEX needed money and that when private placements were made, things would get done quicker, whether in the sense of making arrangements for sale in Peru, completing the clinical studies or finishing the draft protocol, upgrading the plant or pay for research staff, etc. She had requested Ms Chow to pay the purchase price into the bank account of WEX HK in accordance with instructions from WEX HK.”

33.  This finding is supported by evidence from the 1^st Plaintiff.  Such a finding and the observation we made at [27] above provided sufficient answer to Mr Carolan’s submissions that no representation was made by the Defendants with the intention it should only operate on the Plaintiffs with regard to the minimum quantity of shares to be purchased under the Share Agreement.

34.  Pleading point aside, Mr Carolan submitted that the finding at [90] had nothing to do with the representations.  With respect, counsel misapprehend the significance of that finding.  The Shares were purchased through private placement offered by the Defendants in circumstances set out at [90].  In the absence of any disclaimer on the continuing effect of the representations, in particular the CP representation, and in light of the nexus between that representation and the need for funds by Nanning, the judge was plainly right in holding that the element of inducement was established.

35.  Mr Carolan also took us through some paragraphs in the witness statement of the 1^st Plaintiff and submitted that the evidence did not support the finding on inducement.  Counsel focused on the statement by the 1^st Plaintiff that the quid pro quo for the Share Agreement was the rights of distribution.  Again that is an unduly narrow view of the evidence.  As we have explained above, all the transactions (the Share Agreement and the distribution agreements) were inter-related and without the CP representation,it is plain as a pikestaff that the Plaintiffs would not have purchased the Shares.  Those making the CP representation on behalf of the Defendants could not have failed to appreciate the inducement to purchase the Shares arising from such representation.

36.  In short, the CP representation was made not only to induce the Plaintiffs to acquire the distributorship but also to induce the Plaintiffs to purchase the Shares. Thus, the evidence clearly established that the Plaintiffs acted on the CP representation in the manner intended by those making the representations on behalf of the Defendants.  The finding of the judge in this respect is consistent with the legal propositions relied on by Mr Carolan which are now stated in Spencer Bower, Turner & Handley on Actionable Misrepresentation (5^th Edn) paras 5.05 and 6.06 [2].

37.  Spencer Bower, Turner & Handley on Actionable Misrepresentation (5^th Edn) para 6.03 is directly on point regarding the inducement in the present case:

“…Proof of the necessary intent is facilitated by the ordinary inferencethat the representor intends the natural and probable result of his acts. Thus materiality and inducement are closely related. Questions of inducement and materiality must be approached by comparing the representation with the truth, not with silence. A misrepresentation is established by proof of material difference between the representation and the truth. The validity of testing inducement by comparing the representation with the truth is supported by the established principle that causation/inducement continues until the truth is known.”

38.  We also reject Mr Carolan’s submission that the effect of the CP representation should only be confined to the time when the Share Agreement was made.  It is wholly unrealistic to regard the purchase of Shares as mere mechanics for putting the Share Agreement into effect.  As we have seen, there is an element of flexibility in the Share Agreement in respect of the quantity of shares to be purchased.  Further, in light of the finding at [90] and the purchase through private placement, and given the continuing nature of a representation (as the Defendants never corrected the CP representation at any stage prior to the relevant purchases), the Defendants were clearly maintaining the façade that Nanning had the exclusive right under the patent when requests were made on their behalf to the Plaintiffs to inject funds into the 1^st Defendant by way of share acquisitions.

39.  For the purpose of the claims advanced, it is sufficient for the Plaintiffs to establish that the CP representation was false from the time of the first purchase in question, viz 30 November 2001.  Thus, the arguments on the timing of falsity of the CP representation before the judge were confined to the date of the final judgment (27 November 2001) and the date of the change of registration (22 November 2002), see [41] to [55] of the judgment.  The judge found in favour of the Plaintiffs on such dispute, holding that the falsity arose on the date of the final judgment.  This is already sufficient for the Plaintiffs’ purposes.

40.  We would however put down a caveat here.  On the facts and materials before us, in principle it is highly arguable that the CP representation was inherently false and misleading as soon as it was made in 2001 as by then the first instance court had already found on 19 March 2000 that Nanning was not qualified to be the owner of the patent.  Making an unqualified CP representation in such circumstances, to us, is materially and substantially false.

41.  The judge did not find it necessary to go that far in light of the arguments of the parties and the facts of the case.  We are content to leave it at that.

42.  In light of the above analysis, it is not necessary to dwell on the arguments concerning the GlobalMed representation.  Mr Carolan may well be correct in saying that such representation is more relevant to the distribution agreements than the purchase of Shares.  But this submission cannot assist the Defendants since the misrepresentation based on the CP representation was sufficient to provide the basis for giving the Plaintiffs the relief in the judgment.

43.  For these reasons, we find the appeal against the main judgment to be wholly unmeritorious.  We reject all the grounds of appeal in that respect.

The appeal against the interest rate for pre-judgment interest

44.  In the Decision of 5 September 2017, the judge awarded pre-judgment interest to the Plaintiffs at judgment rate.

45.  Though pre-judgment interest is a matter of discretion under section 48 of the High Court Ordinance, the norm in Hong Kong is prime rate plus 1%.  This was acknowledged by the judge at [6] of the Decision.  She also accepted this to be the starting point in considering what rate should be used for pre-judgment interest in the present case, see [15].

46.  The judge noted at [9] that higher rates of interest had been awarded in two cases on misrepresentation, ADS v Wheelock Marden HCA 1670/1989, 25 March 1997 (pre-judgment interest awarded by Barnett J at 13%); Wong Fuk Wah v Chu Fung CheeHCA 3181/1992, 12 March 1996 (pre-judgment interest awarded by Le Pichon J at 11%).

47.  After rejecting the submissions of Mr Carolan based on the facts of those cases, the judge said the following at [16] and [17] of the Decision,

“ 16. With regard to reasons (ii) to (iv), Mr Carolan avoided the rationale behind Ms Chow’s investment. She regarded CAD$2 million investment in the shares to be insignificant having regard to 6 years’ exclusive distribution rights in Peru with 100% profit margin (§94, Judgment). Mr Shum never disputed those potential returns.

17. This was a thoroughly bad case of fraudulent misrepresentation and concealment.  The Plaintiffs were kept out of their money, being made to wait for a real opportunity for profits for 8.5 years until the Acro Pharm Agreement was terminated with nil return.  Having considered the legal principles set out above, I am not minded to exercise my discretion to vary the pre-judgment rate of interest.”

48.  In Komala Deccof v Perusahaan Pertambangan Minyak Dan Gas Bumi Negara[1984] HKLR 219, the Court of Appeal found it necessary to interfere with the award of pre-judgment interest by the judge in that case.  At that time, there was no established practice in Hong Kong on pre-judgment interest rate.  Cons JA held that it was desirable for the Court of Appeal to give some general guidance.  Thus, it was said at p 223B:

“ The rate of interest is also a matter within the discretion of the trial judge, but it is clearly undesirable that there should be arbitrary variations between similar cases and in my view it is desirable that this court should give some general guidance on the question, so that reasonable consistency may be promoted.”

49.  After referring to the practice in the Commercial Court in England, Cons JA suggested to use 1% above prime as the appropriate rate for pre-judgment interest unless there is evidence in a particular case which shows some other rate to be more appropriate.

50.  Since then, this becomes the established practice in Hong Kong.  The Court of Final Appeal followed this practice in Polyset Limited v Panhandat Limited FACV 28/2000, 25 April 2002 at [13].  In that case, Ribeiro PJ described this rate as “reflecting the theoretical cost to the plaintiff of borrowing the sums withheld”.  On the facts of that case, the Court of Final Appeal adopted a different rate used by the judge based on the peculiar circumstances in that case, see [14] and [15].

51.  Subsequently, there were two judgments of this Court handed down on the same date, 20 May 2016, in which the question of pre-judgment interest rate was considered.  Unfortunately, the full effect of these judgments were not brought to the judge’s attention [3].  In Waddington Ltd v Chan Chun Hoo ThomasCACV 10/2014, 20 May 2016, the Court (Lam VP, Kwan and Barma JJA) allowed the appeal against the judge’s award of interest at a lower rate and held that interest should be awarded on prime rate plus 1%.  In Tadjudin Sunny v Bank of AmericaCACV 12/2015, 20 May 2016, the Court (Kwan, Barma JJA and Chow J) again allowed the appeal on pre-judgment interest rate and reiterated as follows at [179]:

“ …With respect to the judge, we are of the view that having regard to the long standing practice of taking 1% over prime as the starting point for the award of pre-judgment interest, any suggestion that this starting point should be changed is something that should be considered only where there is evidence before the court to support such a change. It is, with respect, not satisfactory to proceed on the basis of the impressions (however well founded they may turn out to be) of the individual judge. …”

52.  In both judgments, the Court of Appeal left open the scope for future adjustment, see [183] in Tadjudin Sunny:

“ That is not to say that there may not be a case in the future in which the necessary evidential foundation (which might, for example, consist of banking evidence as to the manner in which rates for unsecured lending are fixed, that shows clearly that prime rate is no longer, or very rarely used as a starting point) will be laid for a consideration of whether or not the time has come to move away from prime rate plus 1% as the starting point for the awarding of pre-judgment interest. …”

53.  See also Waddington at [186].

54.  These two cases concerned judges at first instance adopting pre-judgment interest rate lower than prime rate plus 1%.  In the present case, the judge awarded interest at judgment rates which are higher than prime plus 1%.

55.  Due to the concealment of the fraud as found by the judge, the pre-judgment interest covers a long period of time.  There is no evidence before the judge to suggest that the unsecured lending rates in the money market in Hong Kong has been at variance with prime rate plus 1% so that the conventional rate was not a realistic benchmark for the theoretical borrowing costs of the Plaintiffs.

56.  It should be borne in mind that an award of interest is to compensate the Plaintiffs for being deprived of the money during the relevant period and in commercial cases such compensation is reflected in interest at a rate at which a person in similar position as the Plaintiffs generally would have had to pay to borrow money, see Tate & Lyle Distribution v GLC[1982] 1 WLR 149, cited and adopted in Komala Deccof at p 223.

57.  With respect, neither the reason given by the judge at [16] nor that at [17] provides sound basis for departing from the conventional rate.  The investment target of the Plaintiffs alluded to at [16] could not form the basis for the theoretical cost of borrowing.  The unsavoury nature of the misrepresentation is also not relevant as pre-judgment interest is not to provide an alternative for aggravated damages.

58.  There was no discussion in the two earlier cases (where higher rates of interest were adopted) on the basis for departing from the starting point and Komala Deccof was not referred to.  We do not consider those cases as providing sound authorities to support the judge’s decision.  In principle, there should not be a separate rule for pre-judgment interest rate in claims based on fraudulent misrepresentation.

59.  Hence, though there is an element of discretion in the award of interest, we find that the judge erred on principle in giving pre-judgment interest at judgment rate.  We do not see any basis for departing from prime rate plus 1% in the present case.  To this extent, Mr Carolan is successful in this part of the appeal.

Hong Kong rate or Canadian rate?

60.  Mr Carolan submitted that as the judgment was awarded in Canadian dollars, the relevant interest rate should be interest rate for Canadian dollars.

61.  The judge rejected that submission at [21] to [23] of the Decision.

62.  Before us, Mr Carolan cited Fargo Shipping v Hwa Haur Trading [1979] HKLR 327; Libertarian Investments v Hall (2013) 16 HKCFAR 681;Waddington Ltd v Chan Chun Hoo Thomas, supra and Tadjudin Sunny v Bank of America, supra to support his argument.

63.  We agree with Mr Carolan that Practice Direction 16.2 does not address the question of interest rate for pre-judgment interest in respect of a judgment sum in foreign currency.  Hence, with respect to judge, section 6 of Practice Direction 16.2 (which only deals with post-judgment interest) cannot provide any guidance.  After judgment, the debts or damages claimed is merged into the judgment.  The latter becomes an obligation arising from the judgment issued by a court in this jurisdiction.  Hence, it is natural that it should carry with it post-judgment interest at the Hong Kong judgment rates.

64.  On the other hand, we do not accept that the cases cited by Mr Carolan show that it is immutable for judgment sum in foreign currency to be awarded with pre-judgment interest on prime rates of that foreign market.  Other than Fargo Shipping, there was no discussion in other judgments cited by counsel on the rationale for awarding pre-judgment interest at foreign rates.  In Libertarian Investments Ltd, the rate was agreed.  In the two Court of Appeal judgments in Waddington and Tadjudin Sunny, the relevant comments were made in the context of explaining the award in Libertarian Investments had no bearing in the context of a judgment in Hong Kong dollars.

65.  In Fargo Shipping v Hwa Haur Trading, supra, Cons J held that with judgment in foreign currency, the court should have regard to the commercial rates which prevailed in Hong Kong in relation to the particular foreign currency in awarding pre-judgment interest.  The learned judge took the view that such approach was in accord with the policy adopted by Bristow J in Miliangos v George Frank (Textiles) Ltd (No 2)[1977] 1 QB 489.  Evidence was adduced by the plaintiff before Cons J from a bank officer in a local bank on deposit rate for foreign currency.  His evidence was that his bank would offer the same interest rate regardless of what currency was deposited.  Cons J found that remarkable but in the end felt obliged to act on it as this was the only evidence before him.

66.  There are material differences between the approach of Cons J and the one adopted in Miliangos v George Frank (Textiles) Ltd (No 2), supra.  The rate used by Bristow J in the latter case was the foreign borrowing rate at the foreign jurisdiction.  The plaintiff there was a Swiss person.  In contrast, in Fargo, the plaintiff was a foreign company (but not a US company) and the judgment sum was in US dollars.  In light of the decision of the Full Court in The Oceantramp[1970] HKLR 52, Cons J used the deposit rate obtainable in a bank in Hong Kong.

67.  As far as the use of deposit rate is concerned, Fargo should be regarded as having been overtaken by Komala Deccof.  As a matter of principle, given the rationale for awarding interest discussed earlier, borrowing rates should be the relevant ones for pre-judgment interest as opposed to deposit rates.  

68.  As regards the question if the rates should be rates of such foreign currency in Hong Kong or in the foreign jurisdiction, Hong Kong Civil Procedure 2018para 6/L/15 stated as follows:

“ If judgment is given in a foreign currency, interest is usually taken at the rate at which that currency could be borrowed in the country in which the debt should have been paid.”

69.  This is not an immutable rule because the court may adopt other interest rates to avoid injustice, eg due to the inability to borrow such currency in the money market at the place where the money should have been paid.  In Helmsing Schiffahrts GmbH v Malta Drydocks Corp[1977] 2 Lloyd’s Rep 444, notwithstanding that the judgment was in Maltese pounds, Kerr J awarded pre-judgment interest based on German commercial borrowing rates as the plaintiff German shipowner was unable to borrow Maltese pounds in Germany.  Such exception was recognized by the English Court of Appeal in Shell Tankers (UK) Ltd v Astro Camino Armadora SA[1981] 2 Lloyd’s Rep 40 though it had no application on the facts of that case.

70.  In the present case, though the investments into the 1^st Defendant were by way of acquisition of shares in Canadian dollars, pursuant to the instructions of the Defendants, the Plaintiffs actually pay by way of HK and US dollars into the 2^ndDefendant’s bank accounts in Hong Kong, see para 137of the witness statement of the 1^stPlaintiff. The 1^st Plaintiff was a resident in Hong Kong at all material times and the 2^nd and 3^rd Plaintiffs are Hong Kong companies.

71.  The judge obviously took the circumstances under which the money was paid to the 2^nd Defendant into account in deciding not to award pre-judgment interest based on Canadian interest rates.  At [21] of the Decision, the judge found Hong Kong to be the place where the debt should have been paid and the money was paid in Hong Kong through the 2^nd Defendant. There is no appeal against such findings.

72.  We do not agree with Mr Carolan that these matters were irrelevant.  Given the special circumstances under which the Shares were acquired and the manner in which the money was paid, it is within the reasonable options for the judge to exercise the discretion in awarding pre-judgment interest by reference to a reasonable notional borrowing to make good for the deprivation of the judgment sum by the Plaintiffs by way of borrowing rates available in Hong Kong.

73.  In this connection, there was actually no evidence on the borrowing rates for Canadian dollars in Hong Kong.  The only evidence produced by the Defendants was rates published by the Bank of Canada, the central bank in Canada.  We do not know if a Hong Kong person or company without any business or property in Canada can borrow a commercial loan in Canadian dollars based on such a prime rate plus 1%.  We do not accept Mr Carolan’s submission that the court should presume banks would lend Canadian dollars in Hong Kong based on rates published in Canada in the absence of evidence.  Mr Carolan candidly informed the court that despite efforts on their part solicitors for the Defendants were unsuccessful in obtaining any information from banks in Hong Kong on Canadian dollars borrowing rates. 

74.  In our judgment, this Court should proceed on the basis that the Plaintiffs would not be able to borrow Canadian dollars in Hong Kong at the rates published in Canada.  For the purpose of the notional borrowing in Hong Kong to facilitate the interest calculation, in the present circumstances, the court would adopt the notion that the Plaintiffs would have to borrow Hong Kong dollars equivalent of the judgment sum at Hong Kong dollar borrowing rates.

75.  We therefore hold that the relevant interest rates should be the Hong Kong dollar borrowing rates, viz prime rates plus 1%.

The appeal against the enhanced interest and indemnity costs

76.  On 7 October 2014, the Plaintiffs made a sanctioned offer to settle the whole claim if the Defendants pay the Plaintiffs CAD 1,900,000.  That amount was inclusive of interest.

77.  The Defendants did not respond to the offer.

78.  According to the calculations provided by the solicitors for the Defendants, the judgment in favour of the Plaintiffs, including interests at Hong Kong prime rate plus 1% up to 13 January 2017, is CAD 2,376,435.72.  If the Canadian prime rates were adopted, the amount would have been CAD 2,062,674.03.

79.  We have held that the appropriate interest rates in the present case should be the Hong Kong prime rates plus 1%.  In any event, even assuming Canadian prime rates were adopted, the judgment sum is higher than the sanctioned offer.

80.  Hence, it is indisputable that Order 22, rule 24 was engaged.

81.  The only issue is whether it would be unjust to impose the sanctions of indemnity cost and enhanced interest.  The judge found it was not unjust and ordered accordingly.

82.  In our judgment, the examination of the question if the imposition of these sanctions would be just is a multi-faceted assessment with reference to the facts and circumstances of the case including matters set out in rule 24(5).  In this connection, a trial judge, being most familiar with the trial and the conducts of the parties, is in an advantageous position when performing such assessment.  As such, the approach explained in Re A[2018] HKCA 272 at [19] is apposite: 

“ In other words, the exercise involves the evaluation and weighing of different factors in the circumstances of the case. It also carries with it an element of value judgment. It is an exercise in which different judges can legitimately differ. As such, this Court wouldbe cautious in interfering with such decision. We should adopt the same approach akin to an appeal against the exercise of discretion or an appeal involving a question of mixed fact and law and refrain from disturbing the first instance decision unless it proceeded from some error of principle, reliance on irrelevant considerations, disregard of relevant considerations or it is clearly unsustainable, see L v Canterbury District Law Society[1999] 1 NZLR 467; Tsit Wing (Hong Kong) Co Ltd v TWG Tea Co Pte Ltd[2015] 1 HKLRD 414 at [22] to [28].”

83.  Further, the extent to which the Court would impose the sanctions, as with other aspects in decisions on costs and interest, is discretionary.

84.  In other words, the scope for intervention by this Court in the decision of a judge to impose sanctions under Order 22, rule 24 is very limited.

85.  In this appeal, with respect to Mr Carolan, none of the grounds advanced for challenging the decision of Au-Yeung J in these respects come close to providing a proper basis for intervention by us.  We cannot understand the basis for suggesting that sanctions could not be imposed as the Plaintiffs had not plainly do better than the sanctioned offer.  The rules made it clear that the sanctions should be imposed unless the Defendants made out a case ofinjustice.  Also, as stated above, even if Canadian interest rates were adopted, the sanctioned offer is lower than the judgment sum by CAD 162,674.03 which is not a small margin.  In the Decision of 5 September 2017, the judge had considered the different scenarios in respect of different interest rates instead of simply confining to the one she actually adopted.

86.  We also cannot see the basis for suggesting that the sanctioned offer was not made in good faith.  The Defendants were aware of the long lapse of time from the date when the cause of action accrued to the trial and they should have taken account of the interest element in assessing if the sanctioned offer should be accepted.  The Plaintiffs had no obligation to give particulars to the Defendants as to how interest was calculated in the sanctioned offer.  The Defendants’ legal advisors were in as good a position as the Plaintiffs’ lawyers to do such calculation.  In this connection, we agree with the observations in Antwerp Diamond Bank NV v Brink’s Incorporated (No 2) [2015] 4 HKLRD 628.

87.  We are not impressed by the submission that the sanctioned offer was made at a time when the Defendants were not able to obtain evidence from Mr Shum.  This is not a case where the Defendants could have a good defence but for the evidence of Mr Shum.  With or without the evidence of Mr Shum, the Defendants faced an uphill battle and they should have considered the sanctioned offer seriously.  The judge had duly assessed this aspect at [43] to [50] of the Decision.

88.  The reference by the judge to lack of response to the sanctioned offer is a valid one even though the Defendants have previously made some counter offers in other without prejudice context.  The fact remains that no counter offer was made by the Defendants under the scheme of Order 22. In any event, it was not a significant matter in the overall scheme of thing in the present context.

89.  The judge was plainly right in holding that the Defendants had not made out a case of injustice.

Disposition

90.  For these reasons, save as to extent set out at [59] above, the appeal is dismissed.  We also make a costs order nisi that the Defendants shall pay 90% of the Plaintiffs’ costs of the appeal with certificate for two counsel.  Such costs are to be taxed if not agreed.