HEIBEI ENTERPRISES LTD AND OTHERS v. LIVASIRI & CO (a firm) AND OTHERS

HCA20094/1998

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.20094 OF 1998

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J U D G M E N T

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SECTION 1    INTRODUCTION

1. This is essentially an action for professional negligence and breach of duties against two firms of solicitors, Messrs Livasiri & Co. (the 1^st defendant) and Messrs Ho & Chan (the 3^rd defendant).  It arose out of a project involving Happy Mansion, No.60-62, Village Road, Happy Valley, Hong Kong (“Happy Mansion”) undertaken by the plaintiffs, the 5^th and 6^th defendants in mid-1997, which fell through in 1998 (“the Project”).

1.1     The parties

2. The plaintiffs are all investment companies or, in figurative terms, “window companies” of the Hebei Provincial Government in Hong Kong, responsible for, inter alia, attracting investments into and raising capital for the Province and carrying out investments on behalf of the Province in Hong Kong.

3. The plaintiffs’ shareholders and principal officers were at all material times officials of the Finance Bureau of the Hebei Provincial Government.  They were :

(1)     Mr Yan Cunzeng (“Mr Yan”), the Head of the Bureau.  He was a shareholder and the chairman of the 1^st plaintiff.

(2)     Mr Meng Zhan Biao (“Mr Meng”), the Deputy Head of the Bureau.  He was a shareholder of the 1^st and 2^nd plaintiffs, and a director and general manager of the 1^st plaintiff.

(3)     Mr Wang Guangtian (“Mr Wang”), a deputy division chief of the Bureau.  He was a shareholder of the 1^st and 3^rd plaintiffs, a director of all the plaintiffs and the deputy general manager of the 1^st plaintiff.

(4)     Mr Cui Pan Lai (“Mr Cui”), an officer of the Foreign Department of the Bureau.  He was a director of the 2^nd and 3^rd plaintiffs.

4. Mr Yan and Mr Meng were mostly stationed in Hebei.  Mr Wang, assisted by Mr Cui, was responsible for the daily operations of the plaintiffs in Hong Kong.  Both Mr Wang and Mr Cui were the signatories of the plaintiffs’ bank accounts.  The plaintiffs’ then accountant was a Mr Mak Hon Leung (“Mr Mak”).

5. The 1^st defendant practises in Hong Kong as well as in the Mainland.  The 2^nd defendant is and was at all material times an equity partner of the 1^st defendant.

6. In about October 1996, the 2^nd defendant was introduced to Mr Wang through a Mr Lau Chi Keung of the New China News Agency.  Later, the 3^rd plaintiff appointed the 1^st defendant as its solicitors for its acquisition of 42/F., Far East Finance Centre, Admiralty, Hong Kong (“the FEFC Premises”).  The acquisition, which cost HK$69,120,000, was completed on 18 November 1996.  Since then, the FEEC Premises have been used as the plaintiffs’ office.

7. The plaintiffs were satisfied with the service rendered by the 1^st defendant for acquiring the FEFC Premises.  Subsequently, they appointed the 1^st defendant to act for them in respect of the Project.  The 2^nd defendant and Mr Kelvin Chan Kee Yip (“Mr Chan”), an assistant solicitor in the 1^st defendant’s employ, handled the matter.

8. The 3^rd defendant had at the material times two equity partners, Mr Pat Bobby Ying Ho (“Mr Ho”) and the 4^th defendant, and a salaried partner, Mr Paul Emerson (“Mr Emerson”).

9. On 9 October 2000, the 4^th defendant was convicted on his own plea in HCCC191/2000 of 10 charges of obtaining pecuniary advantage by deception and 1 charge of theft arising from a string of sizable fraudulent transactions.  He was sentenced to 5½ years imprisonment.  According to the Summary of Facts prepared by the prosecution in the criminal proceedings, the Project was an event leading to one of the fraudulent transactions but not a subject matter of any of the charges laid against him.

10. The 5^th defendant was a corporate vehicle of Mr Simon

Cheng Kwok Fai (“Mr Cheng”) for investment in the real property market.  The 6^th defendant, a BVI company, was a subsidiary of the 5^th defendant.  Acting for Mr Cheng, the 5^th and the 6^th defendants in connection with the Project was a Mr Jeffrey She Chin Tong (“Mr She”).

11. The 7^th defendant was the joint venture vehicle for the Project pursuant to a Shareholders Agreement signed by the 3^rd plaintiff and 6^th defendant as shareholders (“the Agreement”) at a meeting held at the 1^st defendant’s office on 16 June 1997 (“the 16/6/97 Meeting”).  It was originally a shelf company.  On 3 July 1997, its shares were formally transferred to the 3^rd plaintiff (70%) and the 6^th defendant (30%).  The Agreement was then, upon the 1^st defendant’s advice, dated the same date.

1.2     Essential facts giving rise to the action

12. Trimmed to their very essence, the undisputed facts giving rise to this action can be briefly stated as follows.

13. Under the Agreement, the 3^rd plaintiff had to make capital contributions of HK$50,000,000 to the 7^th defendant in the form of shareholder loans.  Between 18 June 1997 and 27 August 1997, the 1^st and the 3^rd plaintiffs, as the case may be, sent to the 1^st defendant HK$48,000,000 as such capital contributions (“the Contributions”) thus :

Date	Plaintiff	Amount (HK$)	Mode of payment
18/6/97	3rd plaintiff	4,999,9001	Bank remittance
10/7/97	1st plaintiff	3,799,9001	Bank remittance
10/7/97	3rd plaintiff	200,000	Cheque
11/7/97	1st plaintiff	4,700,2001	Bank remittance
30/7/97	3rd plaintiff	10,300,000	Cheque
16/8/97	1st plaintiff	7,600,000	Cheque
25/8/97	3rd plaintiff	16,200,000	Cheque
27/8/97	1st plaintiff	200,000       ____________	Cheque
	Total :	48,000,000

14. Between 18 June and 27 August 1997, the 1^st defendant transferred to the 3^rd defendant HK$46,800,000 out of the Contributions as follows :

Date	Amount (HK$)
18/6/97	5,000,000	(“the 1st Transfer”)
11/7/97	3,000,000	(“the 2nd Transfer”)
30/7/97	4,700,000	(“the 3rd Transfer”)
31/7/97	10,300,000	(“the 4th Transfer”)
19/8/97	7,600,000	(“the 5th Transfer”)
27/8/97	16,200,000	(“the 6th Transfer”)
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Total :	46,800,000

15. The 1^st defendant retained the balance of HK$1,200,000 to defray, among other things, its legal fees.

16. After the Project had fallen through, the plaintiffs began to press for repayment of the Contributions.  Between May and September 1998, the plaintiffs recouped from the 3^rd defendant HK$10,200,000, and the 5^th defendant HK$800,000.  On 29 October 1998, the 1^st defendant returned HK$400,000.  These sums added up to HK$11,400,000, leaving a balance of HK$36,600,000, which has remained outstanding to date.

SECTION 2    THE PARTIES’ DISPUTES

17. On 24 November 1998, the plaintiffs commenced the present action against the 1^st defendant.  By a consent order dated 29 November 1998, the writ was amended to include other defendants.

2.1     The plaintiffs v. the 1^st defendant

18. In the Amended Statement of Claim, the plaintiffs pleaded the following principal complaints against the 1^st defendant.

19. First, the 1^st defendant was a stakeholder of the Contributions.  In breach of its duties as stakeholder, the 1^st defendant had failed to properly preserve or manage the Contributions and had, without obtaining consent or approval or the plaintiffs, unilaterally appropriated HK$46,800,000 and forwarded the same to the 3^rd defendant without obtaining any security or pledge or any other protection at all.  I will call this the Stakeholder Claim.

20. Second, the 1^st defendant had been negligent in failing to discharge its proper duty and care towards the Contributions in that it had, inter alia, failed to discharge its duty in accordance with its professional standard and conduct to properly stakehold, preserve, and manage the Contributions; and failed to explain to the plaintiffs the possible risks and consequences that might take place should the sum of HK$46,800,000 be transferred to the 3^rd defendant.  I will call this the Negligence Claim.

21. Third, the 1^st defendant had, in breach of its fiduciary duty, failed to return the sum of HK$1,200,000.  I will call this the Residue Claim.

22. The 1^st defendant’s pleaded case on the Stakeholder Claim and the Negligence Claim is, in gist, this.  It did not hold the Contributions as stakeholder.  The 3^rd defendant, with the 3^rd plaintiff’s approval given at the 16/6/97 Meeting, acted for the 7^th defendant.  Pursuant to the parties’ common understanding, the 1^st defendant made the Transfers to the 3^rd defendant as their capital contributions to the 7^th defendant, with the plaintiffs’ full knowledge, approval and consent.  The 3^rd defendant was to hold the same (at least initially) as stakeholder or trustee.  The 1^st defendant was not negligent as alleged.

23. In its Reply, the plaintiffs made the following points :

(1)     On the 3^rd defendant.  They did not appoint the 3^rd defendant to represent the plaintiffs to handle the Project.  Upon the plaintiffs’ instructions, the 1^st defendant was responsible to handle the business in relation to the establishment of the 7^th defendant and acted as the 7^th defendant’s legal representative accordingly.

(2)     On the 1^st defendant’s status as stakeholder.  The plaintiffs’ instructions to the 1^st defendant were that all the capital investment should be kept in the bank account of the 1^st defendant and that the 1^st defendant was wholly responsible for its safe custody.

(3)     On the 1^st defendant’s further role.  The 2^nd defendant had made various representations and guarantees both before 13 June 1997 and at the 16/6/97 Meeting, inter alia, that the control of the Project would be handled by 1^st defendant, that the 1^st defendant would take full responsibility of it and that if there were any loss of the plaintiffs’ capital investment, the 1^st defendant would be responsible for the compensation.

24. On the Residue Claim, the 1^st defendant’s pleaded case is this.  It was entitled to charge the plaintiffs professional charges and disbursements for the services rendered in connection with the Project.  It paid HK$300,000 to Mr She on or about 24 July 1997 pursuant to the 3^rd plaintiff ’s instructions as compensation of the opening of office premises for the 7^th defendant and employing a person to man the same.  After deducting the sums of HK$500,000 (to defray its legal fees) and $300,000, the balance of HK$400,000 had already been returned to the 3^rd plaintiff without complaint.

25. The plaintiffs agreed that the balance of HK$400,000 had been returned.  On Day 6 of the trial (11 May 2004), the plaintiffs agreed to pay the fees for the service rendered by the 1^st defendant in respect of the Project subject to taxation.  But they did not agree to have such fees deducted from the Contributions.  The plaintiffs maintained that they had not instructed the 1^st defendant to pay Mr She HK$300,000 as alleged.

2.2     The plaintiffs v. the 2^nd defendant

26. The plaintiffs sued the 2^nd defendant personally on a dishonoured cheque.

27. It is common ground that on 24 June 1998, the 2^nd defendant gave the 3^rd plaintiff two post-dated cheques respectively dated 30 June 1998 and 2 July 1998 of HK$5,000,000 each.  The cheques were to be presented only if the 3^rd plaintiff had not received two cheques of corresponding amount from the 3^rd defendant on or before 30 June and 2 July 1998 respectively.

28. It is the plaintiffs’ case that the 3^rd plaintiff had not received any cheque from the 3^rd defendant on 30 June 1998.  The 3^rd plaintiff therefore presented the 2^nd defendant’s cheque of 30 June 1998 for payment but it was dishonoured.  The 2^nd defendant’s case is that the 3^rd plaintiff had already received the sum of HK$10,000,000 and the two cheques had been returned to the 2^nd defendant for cancellation.

29. At the first day of the trial (3 May 2004), the plaintiffs and the 2^nd defendant reached settlement whereby their claim against the 2^nd defendant was discontinued without prejudice to any issue or their claims against the 1^st defendant.

2.3     The plaintiffs v. the 3^rd defendant

30. The plaintiffs pleaded that the 3^rd defendant at all material times represented the 5^th and 6^th defendants.  However, without the knowledge consent or approval of the 1^st and the 3^rd plaintiffs, the 3^rd defendant unilaterally alleged that it represented the 7^th defendant and that it represented Start Orient Limited (“Start Orient”) to negotiate the purchase of the 25 units in Happy Mansion.  Between 15 and 18 November 1997, the 3^rd defendant purported to pay a total of HK$56,250,000 to Messrs Ng Lie, Lai & Chan (“NLLC”), who represented 16 out of the 25 owners of Happy Mansion, for the intended purchase of their units.  Further, without the plaintiffs’ knowledge consent or approval, the 3^rd defendant unilaterally appropriated the entire sum of HK$46,800,000 received by way of the Transfers delivered by the 1^st defendant as the capital of Start Orient and forwarded the same to NLLC.

31. The plaintiff further pleaded that the 3^rd defendant had failed to comply with and observe the express terms that the moneys of the plaintiffs were stakeholder money to be held and preserved by the 3^rd defendant as trustee, such terms having been imposed on it by the 1^st defendant by the letters accompanying the Transfers.  By dissipating the same unilaterally, the 3^rd defendant was in breach of its duty as trustee and as stakeholder.

32. It should be noted that the plaintiffs had raised no complaint against Mr Ho or Mr Emerson personally.

33. In their Joint Defence, the 3^rd and the 4^th defendants alleged that only the 4^th defendant acted for the 5^th and 6^th defendants.  They denied that they had acted for the 7^th defendant.  They admitted that the 4^th defendant represented Start Orient in negotiating with the owners of Happy Mansion but averred that the 4^th defendant did not seek or require the consent or approval of the 7^th defendant to represent Start Orient or approach the owners.

34. The 3^rd and 4^th defendants further admitted that the 3^rd defendant had received the sum of HK$46,800,000 by virtue of the Transfers and that the 4^th defendant had disbursed the said sum of HK$46,8000,000.  But they went on to plead that the Agreement was a sham transaction.  The shareholders loan was in truth a general-purpose loan made by the plaintiffs to Mr Cheng.  It was an express or implied condition that the sums advanced would be disbursed by the 4^th defendant to Mr Cheng.  At trial, Mr Ho and Mr Emerson did not seek to pursue this sham defence.  And the 4^th defendant, having been absent throughout the proceedings, was not there to support it.  On Day 16 of the trial (25 May 2004), upon the plaintiffs’ application, I ordered it to be struck out.

35. On Day 66 of the trial (14 October 2004), the plaintiffs’ claim against Mr Emerson was settled, leaving effectively only Mr Ho to defend the plaintiffs’ claims.  The only substantive defence relied on by Mr Ho, as pleaded in the Joint Defence, is that the acts or omissions of the 3^rd defendant pleaded by the plaintiffs said to constitute a breach of the 3^rd defendant’s duty as trustee or stakeholder were not acts or omissions of the 3^rd defendant.  They were acts or omissions of the 4^th defendant only.  Thus Mr Ho was not liable as his co-partner.

2.4     The plaintiffs v. the 4^th defendant

36. The plaintiffs sued the 4^th defendant on a dishonoured cheque dated 22 June 1998 for HK$10,000,000 issued in favour of the 1^st plaintiff.  The 4^th defendant did not plead any substantive defence to this claim.

2.5     The plaintiffs v. the 5^th to 7^th defendants

37. The plaintiffs sued the 5^th defendant on 6 dishonoured cheques which it issued in favour of the 1^st plaintiff with various dates in April 1998, totalling HK$30,000,000.  They were dishonoured when presented for payment on or about 20 August 1998.

38. The plaintiffs pleaded that the 6^th and 7^th defendants had, despite repeated demands, refused to repay the outstanding balance of the Contributions with interest in the total sum of some HK$51 million.  The plaintiffs accordingly claimed against them for damages.

39. None of the 5^th to 7^th defendant had filed any defence.

SECTION 3    THE TRIAL

40. In light of the above, the trial focused principally on the liability of 1^st defendant and Mr Ho as a partner of the 3^rd defendant.  The trial began on 3 May 2004.  Originally set down for 19 days, it took, in the end, 102 days to finish.

3.1     Representation

41. Throughout the trial, the plaintiffs were represented by :

(1)     Mr Kenneth Kwok, SC leading Mr Kenneth Chow and Mr Samuel Wong between Day 1 and Day 27 (3 May to 28 June 2004);

(2)     Mr Kenneth Chow and Mr Samuel Wong between Day 28 and Day 36 (29 June to 30 August 2004); and

(3)     Mr Nigel Aiken, SC, leading Mr Kenneth Chow and Mr Samuel Wong from Day 37 onwards until the end (31 August 2004 to 25 January 2005).

42. The 1^st defendant was represented by Mr Alan Hoo, SC leading Mr Alfred Chan.  Mr Paul Lam appeared for Mr Ho and Mr Emerson of the 3^rd defendant.  The 4^th to 7^th defendants were all absent.

3.2     Documentary evidence

43. A number of the major events leading to these proceedings were evidenced by contemporaneous documents.  They turned out to be the best available evidence on some of the major factual disputes.

44. Initially, the plaintiffs disputed the authenticity of the documents contained in the Disputed Bundle.  However, as the trial progressed, the plaintiffs no longer took issue on some of them, including a letter dated 16 September 1997 from the 3^rd plaintiff to the 3^rd defendant signed by Mr Wang (“the 16/9/97 Letter [P3 to D3]).  Further, in the course of the trial, the plaintiffs were ordered to make further specific discovery.  As will be seen in a moment, the 16/9/97 Letter [P3 to D3] and some of the documents so disclosed by the plaintiffs shed considerable light on some of the factual disputes.

3.3     Oral evidence

45. The plaintiffs called three witnesses, namely, Mr Meng, Mr Wang and Mr Cui.  In light of the factual disputes, I ordered that their witness statements did not stand as evidence in chief.  They gave viva voce evidence instead.  They had all been cross-examined by Mr Hoo extensively and vigorously.

46. None of the 1^st or 3^rd defendant had called any witness.  There is thus no oral evidence to substantiate their defence or the various matters put as their case in cross-examination.

47. Mr Aiken submitted that in civil proceedings, if the party making the allegation, or whose conduct calls for an explanation, elects not to come forward to testify, the court is entitled to draw such adverse inference against him as circumstances may justify : Herrington v. British Railways Board [1972] AC 877.  Further, even in cases where the burden of proof is on the plaintiff and there is extremely meagre evidence to support the plaintiff’s claim, nevertheless if the defendant should elect not to give evidence and there are some specific primary facts which could have been found on the evidence presented to the court, the court is entitled to draw such inference against the defendant from such primary facts : Jone v. Dunkel [1958-1959] 101 CLR 298, High Court of Australia.

48. Mr Hoo submitted that for adverse inferences to be drawn against a defendant who elected not to give evidence, the plaintiff must always make out his case in the first place, though a case to answer is established by some evidence, however weak : McQueen v. Great Western Railway (1875) LR 10 QB 569, Hughes v. Liverpool City Council, unreported, 11 March 1988, Benham Limited v. Kythira Investment [2003] EWCA Civ, unreported.  He submitted that the plaintiffs’ evidence is of such an unsatisfactory nature and unreliable quality that the count cannot make any findings of facts against the 1^st defendant and no adverse inference can be drawn.

49. I will bear in mind the above submissions when I consider the evidence later.

3.4     No case submission

50. At the conclusion of the plaintiffs’ case, Mr Hoo’s took a rare step in civil trials by making a submission of no case to answer on the ground that the evidence led by the plaintiffs was so unsatisfactory or unreliable that the court should hold that the plaintiffs had not discharged the burden of proof : Yuill v. Yuill [1945] P15.  (This tied in with his submission above that that no adverse inference should to drawn against the 1^st defendant.)  Alternatively, he contended that the plaintiffs had failed to prove their claims against the 1^st defendant any way.

51. However, it is not necessary to separately consider the no case submission on its own.  For it does not involve any separate question of law and the matters that Mr Hoo relied on are purely factual and identical to those referred to in his alternative submission.  The no case and alternative submissions can be conveniently dealt with together.  This was in fact what Mr Hoo did in his closing submissions.

SECTION 4    THE PRINCIPAL ISSUES

52. Before going into the evidence, I first identify the principal issues that require my determination.

4.1     As between the plaintiffs and the 1^st defendant

53. It is the 1^st defendant’s pleaded case that it acted for the 3^rd plaintiff in respect of the Project.  However, the 1^st defendant took no issue at trial as to the locus of the 1^st or the 2^nd plaintiff.  So no particular problem arose from the plaintiffs’ status insofar as the 1^st defendant is concerned.

54. A solicitor’s duty is defined by the terms and limits of his retainer and any duty of care to be imposed must be related to what he is instructed to do.  The duties arising from the retainer are to be determined by reference to the relevant circumstances of the case.  The test is what a reasonably competent solicitor would do having regard to the standards normally adopted in his profession :  See Midland Bank v. Hett, Stubbs & Kemp [1979] 1 Ch 384, per Oliver J at pp.402G-403C.  See for example National Home Loans Corporation Plc v. Giffen Couch & Archer (a firm) [1998] 1 WLR 207 where the solicitor was held not to be negligent when his duty had been specifically limited by the instructions that he received.

55. Thus the principal issues between the plaintiffs and the 1^st defendant are :

(1)    On the Stakeholder Claim, did the plaintiffs instruct the 1^st defendant to stakehold the Contributions?

(2)     If so, was the 1^st defendant in breach of its duties as stakeholder?

(3)     On the Negligence Claim, having regard to the plaintiffs’ instructions to the 1^st defendant and the relevant circumstances, what duties did the 1^st defendant owe to the plaintiffs?

(4)     Was the 1^st defendant in breach of those duties so as to render it liable under the Negligence Claim?

(5)     If the 1^st defendant is liable either under the Stakeholder Claim or the Negligence Claim, what is the quantum of damages?

(6)     Was the 1^st defendant liable under the Residue Claim as narrowed in paragraph 25 above?

4.2     As between the plaintiffs and Mr Ho of the 3^rd defendant

56. Mr Lam raised in his closing submissions the point, which was not pleaded, that only the 3^rd plaintiff has the locus to claim against Mr Ho of the 3^rd defendant.  Mr Aiken countered by submitting that Mr Ho had not filed a proper defence.  Leaving aside these preliminary issues aside, the principal issues between them are :

(1)     Whether the dispersing of the moneys coming from the Transfers by the 4^th defendant constituted a wrongful act?

(2)     If so, is Mr Ho, as the 4^th defendant’s co-partner, vicariously liable?  In particular, was the wrongful act of the 4^th defendant committed in the ordinary course of business of the 3^rd defendant so as to render Mr Ho vicariously liable?

(3)     If Mr Ho is liable, what is the quantum of damages?

SECTION 5    THE FACTUAL MATRIX

57. I now come to the evidence.  I will begin with a narrative of the major events leading up to the disputes.  It is based on the agreed chronology of events and those parts of the evidence that are uncontroversial.  The purpose of the narrative is to set out the factual matrix against which the evidence pertaining to the main issues are to be considered.

5.1     The pre-Agreement stage

A.      The initial steps

58. In about April or May 1997, the 2^nd defendant introduced Mr She to Mr Wang.  Discussions about acquiring Happy Mansion then ensued.

59. On or about 12 May 1997, Mr Wang obtained from Mr She some documents, one of which set out an acquisition formula.  According to the formula, the initial deposit for the acquisition was estimated at HK$50 million.  Another document was an analysis on the costs and profits in respect of the acquisition and redevelopment of the Happy Mansion.  The total costs were estimated at HK$380,687,000 whereas the profits (before tax) were projected at HK$103,817,000.  The other documents were two purported layout plans of the building proposed for redevelopment.

60. On 12 May 1997, Mr Wang faxed the above documents (except the two purported layout plans) to Mr Meng in Hebei (“the 12/5/87 Letter [Wang to Meng]”), advising him that it was the 2^nd defendant who took the lead in the project.  Mr Wang asked Mr Meng for his instructions if the plaintiffs would participate in it.  On or about 16 May 1997, Mr Meng replied to Mr Wang by fax, asking him to work out a plan and carry out a feasibility study before the matter was to be referred to Mr Yan for instructions.

61. Later in about mid-May 1997, Mr Meng came to Hong Kong to learn more about the project.

62. On or about 29 May 1997, Mr Wang faxed to Mr Meng for his reference another set of documents that Mr She gave him.  One of them revised the acquisition formula by replacing the acquisition deposit of HK$50 million with HK$70 million.  The other documents were a purported costs and profits analysis for redeveloping Happy Mansions and detailed explanations of the figures in the analysis.

63. By fax dated 4 June 1997, Mr She gave Mr Wang a further revision of the acquisition formula.  The percentage that the sum of HK$70 million represented via-s-via the total acquisition costs was changed from 25% to 27%.

B.      The Acquisition Formula

64. The acquisition formula in its final form (“the Acquisition Formula”), read2 :

“The formula is to have HK$70 million as the acquisition deposit.  Our side’s company [ie Mr She’s side’s company] will sign an acquisition agreement with Your Company [ie the plaintiffs’ company].  Within 6 months capitals will be utilised for the overall acquisition.  If within 6 months, the acquisition cannot be successful, the capital will be refunded in full.  The said sum of money will be placed in a law firm.  Every time when the said sum of money is to be utilised, our company has to produce valid “Conditional Sale and Purchase Agreement” to the law firm for approval and verification before deposit can be released.  And where there cannot be an overall acquisition, each sum of deposit can be returned to the law firm within or before 6 months.  The law firm representing the individual owners of the premises has in law to automatically undertake the responsibility over this amount of deposit of $70 million, actually representing 27% of the total land price of $260 million.  That is, each and every premises owner has to all agree to sell the property before formally obtaining from the law firm the deposit, otherwise all the deposit will be under the care and custody of the lawyer and cannot be utilised.

After the overall acquisition has been carried out smoothly and successfully, legal documents will be drawn up at the same time to complete the transaction within a designated time.  The time for (completion) of transaction had to be further confirmed at the time of the acquisition.  It is estimated that from the time when the provisional conditional agreement is signed, the transaction will be completed at the most not later than 6 months.  (In Hong Kong, Sale and Purchase agreements of real estate, management and release of the deposit have all along relied on law firms’ administration, stipulation and operation while the obligations of lawyers are to be governed by Hong Kong Government legislation.)”

65. Mr Wang confirmed in his oral testimony that the plaintiffs had agreed to the Acquisition Formula as the basis for the Project.  It would appear that the Acquisition Formula set out the parties’ board agreement on how to carry out the Project.  Several points arose from it :

(1)     The plaintiffs and Mr She’s sides of companies would sign an acquisition agreement.

(2)     A sum of HK$70 million would be used as Acquisition Deposit.

(3)     Within six months from the date of the said acquisition agreement, the sum of HK$70 million would be utilised for the overall acquisition.

(4)     If the overall acquisition failed, the Acquisition Deposit would be returned in full.

(5)     The Acquisition Deposit would be placed in a law firm (Firm A).

(6)     Before a particular deposit could be released to the law firm representing an owner (Firm B) from the Acquisition Deposit, Mr She’s company would have to produce a valid conditional sale and purchase agreement to Firm A.

(7)     Firm B had to automatically undertake the responsibility of the deposit and not to release it to the owner until and unless all owners had agreed to sell.

66. Points (6) and (7) appeared to be a double safeguard.  First, Firm A should not release from the Acquisition Deposit any deposit to Firm B until Mr She’s company produced a valid conditional sale and purchase agreement.  Second, Firm B should not release the deposit to individual owner until and unless all owners had agreed to sell.  If the overall acquisition failed within six months, Firm A and Firm B would have to return whatever amount of deposit they were still holding at the time.

C.      Approval obtained

67. On 10 June 1997, Mr Meng came to Hong Kong again.  In the morning on 13 June 1997, he had a meeting with Mr Wang, Mr She and the 2^nd defendant to discuss the project.  During the meeting, the 2^nd defendant advised that a joint venture company should be set up for the purposes of the Project.

68. After the meeting, Mr Meng faxed a letter to Mr Yan (“the 13/6/97 Letter [Meng to Yan]”), seeking his approval to participate in the Project.  Mr Meng made several points in this letter.  First, the Project was intended to be a confirmor sale or figuratively a “one buy, one sell” transaction, to be completed within six months.  Upon successful completion, it would generate a profit of about HK$20 million.  And the plaintiffs would reap half of it.  Second, the plaintiff would contribute as capital HK$50 million representing 60% of the project’s costs.  The partner, Carringford Land Limited (“Carringford Land”), would be responsible for the balance of 40%.  The capital contributions would be deposited with the 1^st defendant and would only be paid out after all the 25 unit owners had signed the agreements.  Third, the 2^nd defendant would handle and take full responsibility of the transaction.  If it fell through, he would be responsible for returning the plaintiffs’ capital contribution while Carringford Land would pay the interest on the capital.  Fourth, Mr Meng could not see any risk.  The chance of success was over 90%.  The 2^nd defendant would take care of the buyer.  The chance of the intended buyer, the China Everbright Bank, buying was 90%.  Lastly, Mr Meng sought Mr Yan’s consent for a sum of HK$5 million to be deposited immediately with the law firm (presumably, the 1^st defendant).  The balance had to be raised by borrowing from the bank.

69. On the same afternoon, Mr Yan gave his approval for the plaintiffs to participate in the Project.  He directed that arrangement to be made for the remittance of the sum of HK$5 million as requested.

D.      Instructing the 1^st defendant to prepare the Agreement

70. The 1^st defendant was then instructed to prepare a shareholders’ agreement for the intended joint venture company.  On 14 June 1997, Mr Kelvin Chan faxed the first draft of the shareholders agreement of the joint venture company to the 3^rd plaintiff (attention Mr Wang) and the 6^th defendant (attention Mr She).

E.      Executing the Agreement

71. The Agreement was then finalised at the 16/6/97 Meeting.  It is common ground that the Meeting was attended by Mr Meng, Mr Wang, Mr She, the 2^nd defendant and Mr Chan.  (It is the plaintiff’s case, disputed by the 1^st defendant, that Mr Cui also attended the meeting although he came late.)  Mr Chan explained each and every clause of the draft to the parties.  Then Mr Wang on behalf of the 3^rd plaintiff and Mr She on behalf of the 6^th defendant signed the Agreement.

5.2     The Agreement

72. Some of the more pertinent provisions of the Agreement3 are summarised below.

          A.      The Project defined

73. The Project is defined as “to acquire and develop Happy Mansion”.  (Clause 1.1)

          B.      Shareholdings

74. The 3^rd plaintiff and the 6^th defendant respectively held 70% and 30% of the issued shares of the 7^th defendant.  (Clause 2 of the Preamble)

          C.     Board of directors

75. The board of directors shall be constituted of not less than three directors, unless and until the shareholders agree otherwise in writing.  The 3^rd plaintiff was entitled to nominate two directors, which it did by nominating Mr Wang and Mr Cui.  The 6^th defendant was entitled to nominate one director, which it did nominating Mr She.  (Clause 6.1)  (On 3 July 1997, the above nominations took effect when Mr Wang, Mr Cui and Mr She were formally appointed directors of the 7^th defendant.  It is common ground that no other directors had since been appointed.)

76. The control of the business and the policy of the running of the business of the 7^th defendant shall be determined by the board of directors.  (Clause 7.1)

          D.     Completion of the Project

77. Unless and until the written consent of all the parties to the Agreement have been obtained, the only business that the 7^th defendant is engaged in shall be to acquire and develop the Project.  (Clause 2.1)

78. The 3^rd plaintiff and the 6^th defendant shall use their best endeavours and most economical means, within six months after the signing of the Agreement, to realise and complete the business objective of the 7^th defendant as stated in Clause 2.1, which refers to binding all bona fide owners in the Project with a contract that can be enforced by specific performance or one that has the same effect indirectly.  (Clause 2.2)

          E.      Bank account

79. Unless approval had been obtained from both shareholders, the operation and transaction of the bank account owned by the 7^th defendant shall be jointly signed by the nominee of both of them for the same to be effective.  (Clause 7.3)  (It is common ground that despite Clause 7.3, no bank account had been opened by or for the 7^th defendant at all.)

F.       Shareholders’ loans

80. The total amount of capital contributions in the form of shareholders’ loans was agreed at HK$71.5 million, which was spilt between the 3^rd plaintiff and the 6^th defendant in the same 70/30 ratio.  In monetary terms, the 3^rd plaintiff agreed to contribute HK$50 million and 6^th defendant, HK$21.5 million.  (Clauses 11.2 & 3 and the Schedule)

81. Subject to Clause 12, the shareholder’s loans were repayable at once upon demand.  The repayment shall be made according to the corresponding shareholdings ratio.  Subject to any written consent of the shareholders, the loans shall incur interest at the best lending rate fixed by the Hong Kong Association of Banks at the time.  (Clause 11.3(b))

82. All provisions of shareholders’ loans made by the 3^rd plaintiff and the 6^th defendant to the 7^th defendant had to be processed and settled through law firms practising in Hong Kong.  (Clause 11.3(c))

          G.      Repayment of the shareholders’ loans

83. The shareholder’s loans were not repayable within six months after the Agreement had been executed.  (Clause 12.1)

84. The 6^th defendant irrevocably guaranteed and gave undertakings to the 3^rd plaintiff that, if the 7^th defendant was unable to realise and complete the business objective stated in Clause 2.2 within six months after the execution of the Agreement, unless it was caused by the 3^rd plaintiff’s breach thereof :

(a)      The 3^rd plaintiff should be entitled to demand the 6^th defendant to put the loan interest that the 7^th defendant owed to the 6^th defendant (but not including the loan capital provided by the 3^rd plaintiff) to a lower priority than the loan capital and the loan interest owed by the 7^th defendant to the 3^rd plaintiff;

(b)     If the 3^rd plaintiff did not receive the full amount of the loan capital and the loan interest within 14 days after they had demanded the 7^th defendant to repay, the 6^th defendant should immediately pay the outstanding differences of the loan and interest to the 3^rd plaintiff unconditionally, provided that the maximum amount of guarantee provide by the 6^th defendant should not exceed the loan interest amount owed by the 7^th defendant to the 3^rd plaintiff at the time.  (Clause 12.2)

5.3     Making the Transfers

85. On the evidence before me, it is not clear if the 6^th defendant had ever made any capital contribution to the 7^th defendant pursuant to the Agreement at all.  As to the Contributions made by the 1^st and 3^rd plaintiff, see paragraph 13 above.  How and under what circumstances the 1^st defendant then made the Transfers out of the Contributions to the 3^rd defendant merit closer examination.

A.      The 1^st Transfer

86. The first remittance received by the 1^st defendant was HK$4,999,900 (HK$5,000,000 less HK$100 bank charge).  On 18 June 1997, the 1^st defendant made the 1^st Transfer (HK$5,000,000) to the 3^rd defendant by cheque.  The covering letter accompanying the cheque (“the 18/6/97 Letter [D1 to D3]”) read as follows :

“      We act for [the 3^rd plaintiff ] and are instructed to send our cheque in your favour for the sum of HK$5,000,000 being our client’s shareholder loan to [the 7^th defendant] in respect of the acquisition of the properties at [Happy Mansion].

       The cheque is sent to you subject to your firm’s personal undertaking to hold the said sum of money as stakeholders on condition that the said sum of money shall only be released to [the 7^th defendant] after having delivered by us to you a written direction to release the same to [the 7^th defendant].”

I will refer to the aforesaid undertaking imposed by the 1^st defendant on the 3^rd defendant as “the Undertaking” below.

87. The 1^st defendant then advised the 3^rd plaintiff of the 1^st Transfer by letter dated 18 June 1997 (“the 18/6/97 Letter [D1 to P3]”) thus :

“      敝所已收到贵司昨天的汇款並确认收到贵司港币四百九十九万九千九百元正。现随函附上敝所正式收据编号31372。

       此外敝所亦于今天给于贺英、陈国炎律师事务所一张港币五百万元的支票作为贵司给予题述项目合作公司天景发展有限公司的股东贷款，同時规定该律师事务所需以托管人身份保存该五百万元的款项，並需要得到敝所的书面指示後方能支付给予合作公司。现随函附上该有关信件给予贵司存档。

       ……”

The original Receipt 31372 (“the Official Receipt”) and a copy of the 18/6/97 Letter [D1 to D3] were enclosed.

88. The following points emerged from the 18/6/97 Letter [D1 to P3] and the Official Receipt :

(1)     The Official Receipt clearly stipulated that the sum of HK$4,999,900 received by the 1^st defendant was “stakeholder money to [the 3^rd defendant]”.

(2)     The 1^st defendant advised the 3^rd plaintiff that it had sent to the 3^rd defendant HK$5 million, the first instalment of capital contribution to the 7^th defendant.

(3)     The 3^rd defendant was to hold the money as stakeholder with the Undertaking imposed.

(4)     Pursuant to the Undertaking, the 3^rd defendant could only pay the HK$5,000,000 to the 7^th defendant upon receiving the 1^st defendant’s written instruction.

B.      The 2^nd to 6^th Transfers

89. By letter dated 27 June 1997 (“the 27/6/97 Letter [D1 to P3]”), the 1^st defendant, among other things, asked the 3^rd plaintiff to arrange the payment of the balance of its capital contribution of HK$45 million to the 1^st defendant for handling.  This letter read :

“      ……

此外敝所已向佘展堂先生查询合作项目的进展情況。根据佘先生介绍，佘先生曾与跑马地项目的业主举行业主大会，並已取得所有业主同意向其出售物业单位，若贵司资金一经到位，即可以与所有业主签订买卖合同。而敝所为保障贵司的出资贷款问题，在转交贵司第二期出资时将附加合作公司需要与全体业主签订买卖合同才准许放款给予卖方个別业主的先决条件，以保障贵司利益。

请贵司尽快安排第二期出资港币四千五百万给予敝所处理。……”  (Emphasis supplied)

90. Four points arose from the 27/6/97 Letter [D1 to D3] :

(1)     The 1^st defendant had to understand from Mr She as to the progress of the Project.

(2)     According to Mr She, once the capital contributions to be made by the plaintiffs were made available, agreements for sale and purchase with the owners could then be signed.

(3)     The 1^st defendant would forward and transfer (转交) the 2^nd instalment of the 3^rd plaintiff ’s capital contributions of HK$45,000,000.

(4)     To protect the 3^rd plaintiff ’s interest, the 1^st defendant would impose a pre-condition that the moneys were to be released to the vendors (presumably, the individual owners of the 25 units in Happy Mansion) only after the 7^th defendant had signed sale and purchase agreements with all the owners (“the Pre-Condition”).

91. In the event, the 1^st and 3^rd plaintiffs forwarded the balance of HK$43,000,000 to the 1^st defendant, who then transferred HK$41,800,000 to the 3^rd defendant.  In each of the covering letters accompanying the cheques for the 2^nd to 6^th Transfers, (“the Covering Letters [D1 to D3]” collectively), the 1^st defendant imposed the Undertaking on the 3^rd defendant.  However, it had not imposed the Pre-Condition on the 3^rd defendant as mentioned in the 27/6/97 Letter [D1 to P3].

92. The 1^st defendant did not copy the Covering Letters [D1 to D3] to the plaintiffs at the time.  They were only provided in one set on 3 October 1997.  The letter enclosing the copy Covering Letters (“the 3/10/97 Letter [D1 to P3]”) read :

“按照贵司指示，现将日期为1997 年7 月3 日之天景发展有限公司股东协议书副本及敝所代表贵司支付给予Ho & Chan的股东贷款款项的有关信件一套给予贵司存档。

       敝所现确认天景发展有限公司的公司名册现存放于敝所，贵司如有需要可随时领取或查阅。”

In this letter, the 1^st defendant stated that it made the Transfers to the 3^rd defendant on behalf of the 3^rd plaintiff.

5.4     Mr She moving into FEFC Premises

93. In or about July 1997, Mr She moved into FEFC Premises as a tenant.  He occupied an office, and his assistant, an office desk.  Mr She had his own fax machine.  According to his calling card, the 7^th defendant was said to be a subsidiary of the 1^st plaintiff; Mr She was a director of both the 7^th defendant and Carringford Land; and Mr She’s fax number was 2143-6032.

94. By cheque dated 24 July 1997, the 1^st defendant paid a sum of HK$300,000 to Carringford Land from its client’s account.  This sum, as noted, came from the HK$1,200,000 retained by the 1^st defendant from the Contributions.  According to the 1^st defendant’s cheque voucher of the same date, the client was stated to be the 7^th defendant.  This sum was described as “part of the commission for the acquisition of the captioned re-development property”, which could only mean the Project.

95. In about mid-1998, after the Project had fallen through, Mr She left the FEFC Premises.

5.5     Purported processing of the Project

96. On 27 August 1997, Mr She wrote to Mr Wang reporting on the purported progress of the acquisition of Happy Mansion.  He painted a rosy picture and mentioned these points :

(1)     The acquisition was progressing very smoothly.

(2)     The views of all the owners had been unified.  Presumably, he meant that they were all prepared to sell.

(3)     But several owners had asked for an increase of about 10-15% in the purchase price.  That would not affect the profit estimate because the selling price could be increased by 10-20% in light of the rising market condition.

(4)     All the documents and agreements needed 45 to 60 days to complete.

(5)     Discussion with several groups about the sale had already begun.

(6)     The project should be completely successfully.

97. Mr She enclosed with this letter a table on the purported acquisition progress.  The table set out the particulars of the progress in respect of each unit.  (Two of the units were purportedly held by one 昌境投資有限公司, a company controlled by Mr She’s side (“昌境”).)  Mr She estimated that the profit would range from HK$18 to 25 million.  Two newspaper clippings on the property market in the Happy Valley area were also attached.

98. On 20 September 1997, the 1^st defendant wrote to the 3^rd defendant, requesting as per the 3^rd plaintiff ’s instructions for copies of the duly signed preliminary agreements for sale and purchase in respect of the acquisition of the units in Happy Mansion (“the 20/9/97 Letter [D1 to D3]”).  This letter was copied to the 3^rd plaintiff, attention Mr Cui and Mr Mak.

99. On 23 September 1997, the 3^rd defendant wrote back (“the 23/9/97 Letter [D3 to D1]”).  According to this letter, the 3^rd defendant had reminded its client to send the duly signed preliminary agreements for sale and purchase to the plaintiffs for perusal.  The 3^rd defendant was instructed that its client would deliver the same directly to the plaintiffs.  In the meantime, the 3^rd defendant was awaiting the draft formal agreement for sale and purchase from the vendor’s solicitors and would let the 1^st defendant have sight of the same in due course.

100. By letter dated 17 October 1997, Mr She reported the purported progress of acquisition to Mr Meng.  He said that other than the two units held by昌境, negotiations with other owners had been successful.  The conditional sale and purchase agreements would hopefully be signed within the next 10 days at the law firm’s office.  At the same time, he was contacting various developers about acquisition.  The way to proceed was to sell the company which had acquired the units together with the two units held by昌境to save the 2.75% stamp duty.  Mr She enclosed some further information on Hong Kong real estate for Mr Meng’s attention.  In the enclosure, Mr She stated that his side had already begun talks in respect of the acquisition, repeated the Acquisition Formula in substance, and set out the calculation of the projected costs and profits.

101. In the 2^nd half of November 1997, the 3^rd defendant faxed to the 5^th defendant 16 letters (dated 15 or 18 November 1997 as the case may be) from the 3^rd defendant to NLLC (“the 16 Letters [D3 to NLLC]”).  These were in substance pro forma letters in respect of the purported sale of some of the units in the Happy Mansion.  (The plaintiffs disputed the authenticity of 10 of these Letters which bore the GEN reference numbers.)  According to each of these Letters :

(1)     The 3^rd defendant acted for Start Orient, the intended purchaser of the units.

(2)     A cheque for the purchase price and engrossment of the formal agreement for sale and purchase (in duplicate) were enclosed for the unit referred to therein.

(3)     The cheque was sent against NLLC’s undertaking not to release the same to their client until NLLC had received the 3^rd defendant’s written confirmation that all the 25 unit owners of Happy Mansion had agreed to sell their units to Start Orient.

(4)     Upon receipt of the said confirmation from the 3^rd defendant, NLLC should send the formal sale and purchase agreement duly signed by their client within 7 days.

(5)     The 3^rd defendant would then arrange Start Orient to sign the same.

102. After receiving the 16 Letters [D3 to NLLC], the 5^th defendant faxed the same to Mr She.

5.6     The plaintiffs requesting the return of HK$20,000,000

103. Also in the 2^nd half of November 1997, the plaintiffs were in need of money.  Mr Wang therefore asked Mr She for the return of HK$20 million from the plaintiffs’ capital contributions to the 7^th defendant.

104. On 18 December 1997, Mr She wrote to Mr Meng.  He said that as at December 1997, the deposits formally paid were in the sum of HK$67,040,000.  Five units were still waiting for the release of the deposits by Mr She’s side.  Because of the stock crash in October, a buyer was yet to be found to acquire the units.  In order to protect the plaintiffs, Mr She’s side proposed to first set the target for profits that the plaintiffs might make, say, HK$6,000,000.  That profit plus interest would then be paid by instalments.  If possible, the sum of HK$10,000,000 would be repaid before end of December 1997, the full balance in March and April 1998.  Mr She also said that his side learnt of the plaintiffs’ request to have capital of HK$20,000,000 returned before 15 December 1997.  His side had tried to raise funds by mortgaging a shop premises, car parking space and six residential units without success.  (As later transpired during the course of the trial, these properties were situated at one Profits Mansion, Fei Fung Street, Kowloon and Mr She’s side attempted to effect an mortgage on them to raise money.)  They were still trying to raise funds from all other means.

105. In the end, Mr She’s side of company had been unable to meet the plaintiffs’ request.  The purported mortgage on to the Fei Fung Street Properties only gave rise to further disputes and spawned another High Court Action between some of the parties herein, including the plaintiffs and the 1^st defendant.  That action is pending.

5.7     The Cancellation Agreement

106. On 3 March 1998, the 1^st defendant, pursuant to instructions, faxed to the 3^rd plaintiff a draft of a cancellation agreement to cancel the Agreement (“the Cancellation Agreement”).

107. By letter dated 9 March 1998, the 1^st defendant stated the following to the 3^rd plaintiff :

“      敝所范律師與貴司孟總及王總于今天下午已就題述事宜進行了電話聯糸，敝所確認所有由敝所致送給于賀英、陳國炎事務所的款項，全部加上限制，規定賀英、陳國炎事務所承擔，在未有敝所書面確認下不能將貴司提供的股東貸款動用。

另一方面按照天景發展的股東協議精神，貴司只能要求收取合理股東貸款利息。因律師行與律師行之間退款需時，請貴司盡快決定是否按本解除協議條款與乙方及天景簽署協議，否則在還款時間上可能運作不了。……”

108. By letter dated 11 March 1998, the 1^st defendant sent the final draft of the Cancellation Agreement to the 3^rd plaintiff, the 6^th and 7^th defendants for signing.

109. The following provisions in the Cancellation Agreement4 are pertinent:

(1)     Preamble (D) :  The 3^rd plaintiff had provided to the 7^th defendant as shareholder’s loan a total of HK$48 million for the purpose of the Project.  (Factually, it is incorrect.  The 1^st defendant had only forwarded HK$46.8 million to the 3^rd defendant as the plaintiffs capital contributions to the 3^rd defendant.)

(2)     Preamble (E) :  The Project did not complete within six months according to the Agreement (i.e. on or before 3 January 1998).

(3)     Clause 1.2 :  The 3^rd defendant was the law firm representing the acquisition project.

(4)     Clause 2.1 :  The 3^rd plaintiff and the 6^th defendant agreed to cancel the Agreement pursuant to the terms and conditions of the Cancellation Agreement.

(5)     Clause 2.2 :  The parties and the 7^th defendant agreed that the 7^th defendant had to repay the shareholder’s loan to the 3^rd plaintiff on or before the repayment dates stipulated.  If the shareholder’s loan or part of it was deposited with any third party (including the 3^rd defendant), all parties would used their best endeavours to procure the return of the same from such third party.

(6)     Clause 2.3 :  Clauses 2.1 and 2.2 did not affect the 3^rd plaintiff rights and interest under Clause 12 of the Agreement.

110. In the event, the Cancellation Agreement was duly signed by the parties in or about March or April 1998.  For the 3^rd plaintiff, it was Mr Cui who signed the Cancellation Agreement.  Mr Wang confirmed under cross-examination that he would not have authorised Mr Cui to sign it unless the contents were true.

111. By letter dated 23 March 1998, the 1^st defendant asked the 6^th and 7^th defendants for signed copy of the Cancellation Agreement and reminded them that according to the Cancellation agreement, a sum of HK$3 million would be repayable on 25 March 1998.  In the end, it was Mr Cui who on 16 April 1998 faxed to the 1^st defendant copy of the Cancellation Agreement duly signed by all parties.

5.8     The recovery process

112. What followed were various futile attempts by the plaintiffs between March 1998 and the commencement of this action in November 1998 to recoup their capital contributions.  I will not detail the recovery process except to note the following points.

113. First, the plaintiffs had been directly pressing the 3^rd to 6^th defendants for repayment of their contributions.  Separately, the plaintiffs instructed the 1^st defendant to, and the 1^st defendant did, from time to time issue letters following up the recovery process and demand letters threatening legal action.  This is apparent from the correspondence between the parties at the time.

114. On 20 April 1998, Mr Cui gave a copy of purported sale and purchase agreement in respect of 12/F of the Happy Mansion to Mr Chan.  (It is Mr Cui’s evidence that he received copies of the provisional sale and purchase agreements relating to 10 units from the 4^th defendant on 20 April 1998.  He then faxed the above copy to Mr Chan.)  On the following day, the 1^st defendant wrote to the 3^rd defendant (“the 21/4/98 Letter [D1 to D3]”) :

“      We have received copies of sale and purchase agreements relating to the acquisition of [Happy Mansion] from our client yesterday.  Upon perusal of the documents we find that the purchaser in the said sale and purchase agreement in respect of various units in the Property is a company known as [Start Orient].  Your attention is drawn to [the 18/6/97 Letter [D1 to D3] and the Covering Letters] enclosing our cheques for the shareholder loans advanced by [the 3^rd plaintiff ] to [the 7^th defendant] that the cheques are sent to your firm subject to [the Undertaking].  In the circumstances, please confirm with us urgently the following matters :–

Please identify the party who acquires the Property, and that if the purchase is not [the 7^th defendant], please explain the relationship between the purchaser and [the 7^th defendant].

Please confirm whether the sums of money which we paid to your as stakeholder as referred above are still retained by your firm.

Please advise us of the progress of the acquisition of the Property.

Please also send direct to this office copies of all sale and purchase agreements in respect of each individual units of the Property as soon as possible.”

It is apparent from the 21/4/98 Letter [D1 to D3] that the 1^st defendant was not previously aware of Start Orient’s involvement until Mr Chan received the copy sale and purchase agreement from Mr Cui on 20 April 1998.

115. Third, on 30 April 1998, Mr Meng wrote to the 2^nd defendant (“the 20/4/98 Letter [Meng to D2]”) :

“关于跑马地项目资金问题，已严重影响我司资金调度和其他项目投资，同时也对贵律师行的信誉产生负影响，请尽快按我们两家协议及香港有关法律将资金划入我司帐户。”

116. Fourth, on 21 May 1998, Mr Cui faxed to Mr Chan copies of the 16 Letters [D3 to NLCC].  (It is Mr Cui’s evidence that he received them from the 4^th defendant on the same day.)

117. Fifth, on 9 June 1998, the 1^st defendant at the request of the 3^rd plaintiff set out in a letter the particulars of the payment of capital to the 7^th defendant : HK$46,800,000 to the 3^rd defendant and HK$1,200,000 retained by the 1^st defendant.

118. Sixth, on 10 June 1998, Mr Wang on behalf of the 3^rd plaintiff sent a letter to the 3^rd and 4^th defendants (“the 10/6/98 Letter [P3 to D3 & D4]”).  It summarised the attempts and steps taken by the plaintiffs to recover their monies.  It read :

“關于我司與盈邦公司或其關聯人仕合作收購‘跑馬地項目’，按雙方簽署的股東解除協議，我司應于1998年3 月31 日回收我司全部投入和利息，但因種種原因沒能做到，所以貴所曾二次出函及口頭承諾分期歸還我司投入款項及利息，非常遺憾，至今我司只收回了80 萬元資金，貴所又答應在1998 年6 月13 日和‘跑馬地25戶業主’解除合約后把錢歸還我司。貴所的信譽已引起了我們的懷疑，所以我司決定讓代表我司的律師事務所廖綺雲律師事務所出函致貴所，要求貴所確認我司投入款項的去向及給代表‘跑馬地25 戶業主’的律師樓出一有效的不可撤銷的付款指示，把解除合約后的我司投入和利息直接付款至廖綺雲律師事務所。經過幾天的商談，1998 年6 月9 日貴所又提出在出此付款指示以前，要收到廖綺雲律師事務所願意托管退款中的507 萬元的函件，在當日下午我司把此函轉入貴所后，但貴所仍未能把有效的不可撤銷的付款指示簽署于我們，所以貴所的行為更讓我們懷疑和擔心，我司決定再次重申收購‘跑馬地項目’是用‘天景發展有限公司’，如在1998 年6 月12 日上午 12:00前我司仍沒有收到有效付款保証函件及安排，下午我司會責廖綺雲律師事務所發函致貴所所有的律師及合伙人講清此問題，1998 年6 月13 日中午1:00以前如不能收到我司投入‘跑馬地項目’全部款項及利息，我司會及時報警查處，我們已做好了所有的準備工作，特此發函告之貴所。”

Subsequently on 12 June 1998, Mr Wang did, as threatened, issue letters to Mr Ho and Mr Emerson of the 3^rd defendant.  On the same day, the 1^st defendant issued a letter of demand to the 3^rd defendant asking for repayment by 1:00 pm on 13 June 1998.  The 3^rd plaintiff also faxed the same demand letter to the 3^rd defendant.

119. Seventh, by letter dated 6 July 1998, the 3^rd defendant sent a letter to the 1^st defendant (“the 6/7/98 Letter [D3 to D1]”), setting out its version of the events thus :

“「本所及本客戶對近日與 貴客戶，燕山發展有限公司，間之不協調，深表歉意，本所代表本客戶在此作—澄清及建議新安排，望 貴客戶了解及接受。

早於1997年年初本客戶已開始收購跑馬地項目，唯資金安排上遇到困難，是因早年收購之項目飛鳳街及環鳳街（仍在興建中），尚未能出售，所以需向外尋找合適之伙伴共同發展跑馬地項目，本客戶得與 貴客戶發展合作，實在非常感謝，而與 貴客戶簽署合作協議後，本客戶與上述跑馬地項目之業主進行多次會議及商談，而且得到大多數業主之同意，為展示本合作公司之實力及誠意，所以承諾予各業主支付初步訂金及其他時間表，唯 貴客戶在合作合同簽署後之資金安排先後分開八次支付和支付之時間未能統一，故對收購項目有一定上困難，故本客戶多次未能符合各業主之要求而出現困難，本客戶唯有一力承擔去應付，而 貴客戶又於1997年11至12月份要求先退合本金約貳仟萬元正，本客戶有感於股東間之互助，故承諾從其他項目中抽取資金，但適逢本港多年來罕有之金融風暴，而令致樓股市向下調之影響，故抽取資金未能如期完成，所以本客戶同意以商舖及6個住宅單位轉給 貴客戶作按揭，以抽取資金，唯 貴客戶之銀行未能對商舖作按揭，只以住宅單位做按揭，故只抽得約伍佰多萬元資金，而其後之取消協議，本客戶亦未能完成，故^誤會更加深。本客戶現階段亦繼續進行跑馬地項目之收購(因各業主同意大幅減價及延期，如因現階段停止收購，只會令本客戶出現更大之損失，如支付 貴客戶利息，各項支出及已支出之訂金)，本客戶亦表示誠意，已於上星期退回港幣壹仟萬元正予 貴客戶，並同意月內抽出餘下之資金安排退回。」

Mr Meng said under cross-examination that he was aware of this letter.

120. Finally, on 3 September 1998, a meeting was held in Shenzhen between the plaintiffs, the 2^nd defendant, Mr Chan and Mr She about the recovery of the Contributions.  The plaintiffs’ Mainland legal advisers from Hebei Jili Law Office also attended the meeting.  On 4 September 1998, the 1^st plaintiff faxed a legal advice from Hebei Jili Law Office to the 1^st defendant.  In this legal advice, it was alleged, among other things, that the 1^st defendant had without the 3^rd plaintiff’s authority made the Transfers to the 3^rd defendant.  It was the first time that the plaintiffs made such a complaint in writing.

121. This completes the narrative on the factual matrix.

122. I will turn to the evidence on the principal issues that I have identified in Section 4 above in a moment.  In examining the evidence and making findings, I will take into account counsel’s submissions.  However, I will not deal with every single point taken by counsel.  Suffice it to say that I have already carefully considered their submissions in full.

123. Before proceeding any further, it is convenient to first dispose of two points.  The first relates to the parties that NLLC and the 3^rd defendant represented.  It is a minor point, which was made an issue in the pleadings but can hardly be disputed on evidence.  And I will deal with it in Section 6.  The second point is more substantial.  It relates to the 1^st defendant’s role in respect of the Project.  This I will consider in Section 7.

SECTION 6    Who did NLLC AND THE 3^RD DEFENDANT represent?

6.1     NLLC acting for the unit owners

124. According to the 16 Letters [D3 to NLLC]5, not contradicted by any evidence, NLLC was the solicitors acting for some of the 25 unit owners in Happy Mansion.  The plaintiffs disputed the authenticity of 10 of the 16 Letters [D3 to NLLC] on the basis that the purported sale and purchases referred to therein were bogus.  This does not affect the fact that NLLC did act for some of the unit owners.  I therefore find that NLLC acted for some of the unit owners in the intended sale and purchase of their units.

6.2     The 3^rd defendant acting for the 5^th and 6^th defendants and Start Orient

125. The evidence clearly shows that the 3^rd defendant acted for the 5^th and 6^th defendants.  In the 6/7/98 Letter [D3 to D1]6, the 3^rd defendant stated in effect that it acted for the joint venture partners of the plaintiffs in the Project, which could only mean the 5^th and 6^th defendants.

126. Further, the 16 Letters [D3 to NLLC] clearly established that the 3^rd defendant acted for Start Orient.  Again, the plaintiffs’ dispute on the authenticity of 10 of these 16 Letters does not affect this point.  And in that capacity, the 3^rd defendant dealt with NLLC, the solicitors acting for some of the unit owners in Happy Mansion.  The 3^rd defendant’s role in this regard is also supportable by the Cancellation Agreement.  In Clause 1.2 of the Cancellation Agreement, the 3^rd defendant was referred to as “the lawyer for the acquisition project”, which indicates that the 3^rd defendant was then engaged in the acquisition of the units in Happy Mansion.  And the only entity that was then purportedly negotiating the acquisition of the units was Start Orient.

127. I therefore find that the 3^rd defendant acted for the 5^th and 6^th defendants as well as Start Orient.

128. For the reasons stated in paragraphs 145 to 150 below, I am unable to make any finding if the 3^rd defendant acted for the 7^th defendant.  It follows that I am unable to find, one way or the other, if the plaintiffs had approved of appointing the 3^rd defendant to act for the 7^th defendant at the 16/6/97 Meeting as alleged by the 1^st defendant.

SECTION 7    THE plaintiffs’s case on the 1^ST DEFENDANT’s role other than as a stakeholder

129. The plaintiffs attempted to expand the role of the 1^st defendant  in respect of the Project in two aspects.

7.1     Guarantees by the 2^nd defendant

130. The first aspect takes the matters back before 13 June 1997 when the solicitor-client’s relationship first arose.

131. The plaintiffs sought to allege in the Reply that the 2^nd defendant had at various meetings before 16 June 1997 guaranteed that the 1^st defendant would be responsible for and control the Project.  In their oral evidence, the plaintiffs’ witnesses went on to allege that the 1^st defendant had at various meetings prior to 13 June 1997 guaranteed the profitability of the Project and the safety of the capital contributions to be made by the joint venture partners.

132. However, on Day 34 of the trial (26 August 2004), Mr Chow conceded that the plaintiffs did not seek to rely on these alleged guarantees to support any independent cause of action but would only refer to them as background.  On Day 49 (16 September 2004), I ruled that the plaintiffs were not entitled to rely on such matters to define or expand the 1^st defendant’s scope of duty.

133. In any event, I would have no hesitation to reject the plaintiffs’ case on the alleged guarantees for two reasons.  First, the guarantees, if ever made at all, were no doubt of great importance to the plaintiffs.  They effectively safeguarded the plaintiffs from any loss that might arise from the Project.  But contrary to any reasonable expectation from a commercial point of view, they were not recorded in the Agreement or reduced into writing at all.  Second and more importantly, there is simply no reason why the 2^nd defendant would have to make the alleged guarantees, thereby exposing his firm and him personally to such huge risks.  Neither he nor the 1^st defendant was related to or had any interest in any of the joint venture partners.  They were not party to the Project and did not have any beneficial or commercial interest in it.  The only monetary gain that the 1^st defendant would be able to derive out of the transaction was the fees for the legal service that it rendered to the plaintiffs.  But such fees (shown to be about HK$500,000 subsequently) were obviously insignificant when compared to the financial risks that the alleged guarantees would entail.  It could hardly provide any incentive for the 2^nd defendant to offer the alleged guarantees at all.

134. In the 12/5/97 Letter [Wang to Meng]7, Wang reported to Mr Meng that it was the 2^nd defendant who took the lead in the Project.  In the 13/6/79 Letter [Meng to Yan]8, Mr Meng in his turn reported to Mr Yan that the 2^nd defendant was fully responsible for the operation of the Project and the return of the plaintiffs’ investment should the Project fail.  I note how Mr Wang and Mr Meng had described to their superior the role of the 2^nd defendant and, presumably through him, that of the 1^st defendant in the Project.  They might have their own reasons to do so and I will not speculate.  These letters did not sit well with the fact that it was Mr She, who (1) fed the plaintiffs with information relating to the Project at the pre-Agreement stage and (2) thereafter reported to the plaintiffs on the purported progress of the Project.  Mr She had no business association whatsoever with the 1^st or 2^nd defendant.  In any event, having rejected the plaintiffs’ case on the alleged guarantees, I am not going to attach any weight to the them.

7.2     Operator, stakeholder and guarantor of the Project

135. The second aspect relates to what happened at the 16/6/97 Meeting.

136. The plaintiffs alleged in the Reply that the 2^nd defendant represented at the 16/697 Meeting, among other things, that the 1^st defendant would be responsible for the compensation should the plaintiffs suffered any loss from the investment.  The thrust of the oral evidence of the three plaintiffs’ witnesses is that the 2^nd defendant said that the whole Project was entrusted to the 1^st defendant, that the 1^st defendant would be responsible for the operation of the Project, including finding a buyer for the sub-sale of the units and guaranteeing the safety of the plaintiff ’s capital contributions.  The plaintiffs’ witnesses were in effect alleging that the 2^nd defendant said that the 1^st defendant was the stakeholder, guarantor and operator of the entire Project.

137. The plaintiffs’ case suffered the same sort of difficulties that I have described above.  First, if their case were true, the 1^st defendant would be assuming a very active and central role in the Project.  But none of these important aspects of the 1^st defendant’s role was incorporated in the Agreement or evidenced in some kind of formal agreement between the joint venture partners and the 1^st defendant.  It is further contradicted by the Agreement itself.  Under Clause 12.2, it was the 6^th defendant, and not the 1^st defendant, who offered some sort of guarantee by an irrevocable undertaking in respect of repayment of the 3^rd plaintiffs’ contributions should the Project fail to complete within six months.  Second, I see no reason why the 2^nd defendant had to make such representation, which went well beyond the 1^st defendant’ normal role as solicitors and would expose his firm and himself personally to considerable risks.

138. I further find that on the evidence before me, the 1^st defendant was not responsible for operating and did not operate the Project at all.  It is clear from the narrative on the purported processing of the Project9 and the correspondence emerging at the recovery process10 that the Project was operated by Mr She’s side of companies, including the 5^th and 6^th defendants and Start Orient, assisted by the 3^rd defendant.  And I so find.

SECTION 8    THE STAKEHOLDER CLAIM

139. I now come to the Stakeholder Claim.  The first principal issue is whether the 1^st defendant was instructed to stakehold the Contributions.  The oral evidence of the plaintiffs’ witnesses may be summarised in paragraphs 140 to 143 below.

140. The Contributions were meant to be the plaintiffs’ contributions to the 7^th defendant.  Such contributions should be made as soon as possible.  The 2^nd defendant suggested that the capital contributions by the plaintiffs should be sent to and safe-kept by the 1^st defendant.  The moneys were to be deposited with the 1^st defendant for 3 reasons :

(1)     to show the plaintiffs’ financial strength to the 25 owners;

(2)     to show the plaintiffs’ sincerity in making the investment;

(3)     to enable the 1^st defendant to carry out the acquisition work.

141. Contrary to those instructions and without the plaintiffs’ knowledge or consent, the 1^st defendant made the Transfers to the 3^rd defendant.  None of the 16/6/97 Letter [D1 to D3] or the Covering Letters [D1 to D3] were written with the plaintiffs’ instructions consent or authority.

142. Sometime in September 1997, Deloittes carried out an audit of the plaintiffs’ accounts up to 30 June 1997 for the purpose of a proposed listing with the Hong Kong Stock Exchange.  The auditors could not locate the official receipt for the first remittance of HK$5,000,000.  Mr Mak, the plaintiffs’ accountant, could not find it either.  He then reported the matter to Mr Cui.  Mr Cui telephoned Mr Chan for the official receipt.  Mr Chan told Mr Cui that the plaintiffs’ money had been sent over to the 3^rd defendant.  That was the first time that the plaintiffs learnt of the 3^rd defendant and the fact that the money had been sent to the 3^rd defendant.  But the 3^rd defendant did not act for the 7^th defendant.  The 1^st defendant did.  The plaintiffs had not heard of the 3^rd defendant previously.  They were not told of its involvement either.  Further, the plaintiffs could not have consented to the 3^rd defendant’s involvement as they would have had to do background checks on the 3^rd defendant and they had not done so.  However, when Mr Chan told Mr Cui that the Transfers had been made to the 3^rd defendant, Mr Cui did not make any record of the name of the 3^rd defendant.  Nor did Mr Meng or Mr Wang asked Mr Cui about the name of the 3^rd defendant when they learnt of the Transfers later.

143. Initially, the plaintiffs denied that it had ever received the 18/6/97 Letter [D1 to P3].  Hence they disputed the authenticity of the Letter and the copy hand-delivery book which had the entry that the Letter was hand delivered to the 3^rd plaintiff on 18 June 1997.  Later the plaintiffs changed their stance and accepted that they had received the letter at the time.  But neither Mr Wang nor Mr Cui had been unable to say exactly what happened to it after receipt.  It had somehow been misfiled, they said.  (This presumably explained why neither Mr Cui nor Deloittes was able to locate the Official Receipt when the audit of the 3^rd plaintiff was carried out in September 1997.)  In March or April 2002, Mr Mak, who had already left the plaintiffs’ employ, was asked to come back to FEFC to locate the Official Receipt.  He found it and it is Mr Cui’s evidence that it was at some stage sent to the plaintiffs’ lawyers.  But for some reasons not apparent form the evidence before me, the Official Receipt has not been disclosed as part of the plaintiffs’ documents.

144. I will consider the veracity of the plaintiffs’ evidence below.

8.1     Did the plaintiffs instruct the 1^st defendant to act for the 7^th defendant?

145. Here, the point is : if the plaintiffs did instruct the 1^st defendant to act for the 7^th defendant, then when the Contributions were sent to the 1^st defendant, it must stakehold them, as capital contributions form the plaintiffs, on behalf of the 7^th defendant.  There is no justification to make the Transfers to the 3^rd defendant.

146. The 1^st defendant’s case is that it was the 3^rd defendant who acted for the 7^th defendant.  This the 3^rd defendant denied.  However, having elected not to give evidence, neither the 1^st defendant nor the 3^rd defendant had adduced any oral evidence to substantiate its respective case.

147. Although the defendants had adduced no oral evidence to the contrary, it does not follow that I must accept the plaintiffs’ evidence.  In fact, I find it quite difficult to accept their evidence.  There is no documentary evidence, either from the 1^st or 7^th defendant, to show that the 1^st defendant had been appointed as the 7^th defendant’s solicitors.  Further, had the 1^st defendant been so appointed, why would it have not acted accordingly?

148. The position revealed by the documentary evidence is far from clear.     The 1^st defendant’s internal vouchers for those parts of the Contributions made on and after 11 July 1997 referred to the 7^th defendant as client.  So did the cheque voucher for the payment of HK$300,000 to Carringford Land11.  Mr Aiken contended that the 1^st defendant had regarded the 7^th defendant as its client and had therefore received the monies on behalf of the 7^th defendant.  But if that were the case, why would the 1^st defendant write in the 18/6/97 Letter [D1 to D3]12 and the Covering Letters [D1 to D3]13 accompanying each of the 2^nd to 6^th Transfers that the 3^rd defendant could only release the money to the 7^th defendantupon receiving the 1^st defendant’s written instructions?  The 1^st defendant would have already received the moneys from the plaintiffs on behalf of the 7^th defendant.

149. Adding to the confusion is that the internal accounting record of the 3^rd defendant relating to the Transfers also referred to the 7^th defendant as client.  But there is no evidence to show that the plaintiffs or the 7^th defendant had so appointed the 3^rd defendant.  Further, in none of the letters issued by the 3^rd defendant had the 3^rd defendant stated that it had acted for the 7^th defendant.  Even the Cancellation Agreement did not make this point clear.  There the 3^rd defendant was only described rather imprecisely as the lawyer for the “acquisition project”, and not the lawyer for the 7^th defendant.

150. In my view, the evidence on the question as to who acted for the 7^th defendant is unsatisfactory and conflicting.  I cannot make any specific finding if it was the 1^st defendant or the 3^rd defendant who acted for the 7^th defendant.

8.2     The 16/9/97 Letter [P3 to D3]

151. As noted, Deloittes carried out an audit of the plaintiffs’ accounts in September 1997 for the purpose of an intended listing exercise.  In the account file kept by Deloittes (Exhibit A) was the 16/9/97 Letter [P3 to D3], which read :

“Dear Sir,

Request for confirmation on outstanding balance as of 30 June 1997

In connection with the audit of Overseas Way (China) Limited, we would be grateful if you could confirm the following balance outstanding with you as of 30 June 1997.

According to our records as of 30 June 1997, the amount deposited with you was HK$4,999,900 which would be released to Sky Grand Development Limited in accordance to a written direction from Overseas Way (China) Limited.

Please confirm by signing in the space indicated below and send the original of this letter directly to our auditors, Messrs. Deloitte Touche Tohmatsu of 50th floor, Hopewell Centre, 183 Queen’s Road East, Hong Kong (attn.: Ms. L K Chu, Audit manager, Group D4A).”

This letter was drafted by Deloittes and signed by Mr Wang on behalf of the 3^rd plaintiff.  The confirmation sought in it was given by the 4^th defendant on behalf of the 3^rd defendant on 30 September 1997.

152. Further, a copy of the 18/6/97 Letter [D1 to P3] with its enclosure, namely the 18/6/97 Letter [D1 to D3] and the Official Receipt was contained in the Deloittes’ file.  They formed part of the 3^rd plaintiff’s account records as of 30 June 1997 as referred to in the 16/9/97 Letter [Ps to D3] above.

153. The 16/9/97 Letter [P3 to D3], the copy 18/6/97 Letter [D1 to P3] and the enclosure including copy Official Receipt kept in the Deloittes’ file are most damaging, if not fatal, to the plaintiffs’ case on the Stakeholder Claim.  It clearly establishes the following points.

154. First, the 18/6/97 Letter [D1 to P3] enclosing the copy 18/6/97 Letter [D1 to D3] and the Official Receipt had not been misfiled after the plaintiffs had received them on 18 June 1997.  They had found their way into the Deloittes’ file on the 3^rd plaintiff’s account records as of 30 June 1997.  They could only have come from the plaintiffs.  Mr Aiken submitted that they were probably supplied by the 1^st defendant.  He was referring to an inspection of the statutory books of the 7^th defendant kept by the 1^st defendant in September 1997.  But those statutory books could not have contained the letters and the Official Receipt.  Further, after sending the Official Receipt to the 3^rd plaintiff, the 1^st defendant only had the filing copy of the Official Receipt.  (The filing copy is what the 1^st defendant had disclosed in its list of documents and there is no allegation that the 1^st defendant had been in possession of the copy Official Receipt and had failed to disclose it.)  What was contained in the Deloittes’ file is the copy Official Receipt, which could not have come from the 1^st defendant.  I reject Mr Aiken’s submission.

155. Second, not only had the plaintiffs received the 18/6/97 Letter [D1 to P3] and the enclosure on 18 June 1997, but they must have also read them and knew of their contents.  The plaintiffs knew perfectly well that the 1^st defendant had on 18 June 1997 made the 1^st Transfer to the 3^rd defendant with the Undertaking imposed.  The plaintiff’s evidence that they first came to know about the Transfers including the 1^st Transfer sometimes in September 1997 must therefore be rejected.

156. Third, the plaintiffs must have instructed the 1^st defendant to make the 1^st Transfer to the 3^rd defendant.  The 16/9/97 Letter [P3 to D3] did not raise any complaint that the 1^st Transfer was wrongful.  Instead, it sought confirmation that the 3^rd defendant had in fact received it.  It follows that the plaintiffs must have instructed the 1^st defendant to forward to the 3^rd defendant their capital contributions to be made to the 7^th defendant under the Agreement.  There is no substance whatsoever in the plaintiffs’ allegations that they had not consented to or approved of the Transfers.

157. Fourth, the plaintiffs had knowledge of the 3^rd defendant’s involvement in the Project.  Otherwise, they would not have instructed the 1^st defendant to forward their capital contributions to the 3^rd defendant.

158. Mr Wang had been unable to come up with any credible explanation why the 16/9/97 Letter [P3 to D3] was written, if the plaintiffs’ case that the 1^st defendant was instructed to stakehold the Contributions and it had without authority made the Transfer to the 3^rd defendant were true.  I can seen none either.

8.3     The plaintiffs’ knowledge of the 3^rd defendant’s involvement

159. There is further evidence relating to the plaintiffs’ knowledge of the 3^rd defendant’s involvement at the time.

160. In the 20/9/97 Letter [D1 to D3]14, the 1^st defendant requested as per the 3^rd plaintiff’s instructions for copies of the preliminary sale and purchase agreements.  The 3^rd plaintiff would not have given such instructions if they were not aware of the 3^rd defendant’s involvement in the Project.  Mr Cui said that he only received the copy preliminary sale and purchase agreements from the 4^th defendant on 20 April 199815.  Obviously, he said so in order to show that the plaintiffs did not previously know about the involvement of the 3^rd defendant and Start Orient.  But I am unable to accept his evidence.  In my view, the plaintiffs requested for the request of the preliminary sale and purchase agreements because they wanted to confirm if Mr She’s side had processed the Project properly.  After all, the joint venture partners envisaged that the Project would be completed within six months.  Further, by the 23/9/97 Letter [D3 to D1]16, the 3^rd defendant said that its clients would directly send the preliminary agreements to the 3^rd plaintiff.  There had been no follow up inquiry.  The only reasonable inference to be drawn, and I so draw, is that the preliminary agreements had been so supplied to the plaintiffs.  It does not make sense that the 4^th defendant would only supply the preliminary agreements in April 1998.

161. The 16 Letters [D3 to NLLC]17 also showed clearly the involvement of the 3^rd defendant and Start Orient.  It is Mr Cui’s evidence that he received them from the 4^th defendant on 21 May 199818.  But his evidence does not bear a closer scrutiny of the copy letters disclosed by the parties.  The copies disclosed by the plaintiffs bore the fax number of Mr She : 2143-630219 whereas those disclosed by the 3^rd defendant did not bear such fax number.  In other words, the plaintiffs’ copies had been faxed to Mr She’s machine and were made from it.  The plaintiffs could not have received them from the 3^rd defendant.  The only reasonable inference that I draw is that the plaintiffs received them in November 1997 probably from Mr She, who had already moved into FEFC Premises, after he had received the same from the 5^th defendant by fax20.

8.4     Other contemporaneous evidence

162. The plaintiffs’ evidence that the 1^st defendant had been instructed to stakehold the Contributions did not sit well with the other contemporaneous evidence.

163. The first piece of contemporaneous evidence is the Acquisition Formula which, Mr Wang confirmed, the plaintiffs had agreed to as the basis of the joint venture.

164. Mr Aiken objected to the court looking at the Acquisition Formula.  He relied on the well-established principle that in construing a written agreement, evidence of negotiations ought not to be received by the court and that evidence should be restricted to evidence of the factual background known to the parties at or before the date of the contract, including evidence of the “genesis” and objectively the “aim” of the transaction : Prenn v. Simmonds [1971] 1 WLR 1381 (HL); Jumbo King Ltd v. faithful Properties Ltd & Ors [1999] 4 HKC 707 (CFA).

165. With respect, the above principle does not assist the plaintiffs because it is not for the purpose of construing the Agreement that the Acquisition Formula is to be considered.  Further, the Acquisition Formula provides information on how the Project was to be implemented, including how capital contributions were to be applied.  This will no doubt shed light on the instructions that the plaintiffs gave the 1^st defendant regarding their contributions.

166. I have set out the terms and effect of the Acquisition Formula in paragraphs 64 to 66 above.  Briefly, the joint venture partners envisaged that the capital contributions were to be placed with a law firm (Firm A) that dealt with the acquisition of the units.  Upon certain conditions being satisfied, Firm A would release the deposit to the law firm representing the unit owners (Firm B).

167. Firm B, on the evidence before me, was NLLC21.  Firm A, according to the plaintiffs’ case, must be the 1^st defendant.  All the reasons advanced by the plaintiffs as to why it was necessary to pay over their contributions to be stakeheld by the 1^st defendant would only make sense if it was Firm A.  There is otherwise no credible reason why the plaintiffs had to come up with the capital contributions upfront but would intend them to be just sitting with the 1^st defendant.

168. But I have already rejected the plaintiffs’ case that they had instructed the 1^st defendant to operate the Project.  I have also found that it was the 3^rd defendant who dealt with the acquisition of the units on behalf of Start Orient.  In other words, Firm A under the Acquisition Formula was in fact the 3^rd defendant.  Hence, the plaintiffs gave the 1^st defendant instructions to forward their capital contributions to the 3^rd defendant.

169. The next piece of contemporaneous evidence is the 27/6/97 Letter [D1 to P3]22.  By this Letter, the 1^st defendant asked for the balance contributions of HK$45,000,000 for them to be forwarded and transferred.  It shows clearly that the 1^st defendant was not to stakehold the balance contributions.

170. Finally, if the plaintiffs had indeed instructed the 1^st defendant to stakehold the Contributions, then the 1^st defendant would have been acting in wholesale disregard of such instructions when it made the Transfers to the 3^rd defendant.  Common sense dictates that the last thing that the 1^st defendant would do was to keep theplaintiffs informed of the Transfers.  But that was exactly what the 1^st defendant did.  The Letter 18/6/97 Letter [D1 to P3], which was sent right after the 1^st Transfer, reported the matter and enclosed the Official Receipt which expressly described the money as stakeholder money to the 3^rd defendant.  See also the 3/10/97 Letter [D1 to Ps].

171. In my view, the contemporaneous evidence shows overwhelmingly that the plaintiffs had not instructed the 1^st defendant to stakehold the Contributions.

8.5     The plaintiffs’ subsequent conduct

172. Finally, the plaintiffs’ evidence is flatly contradicted by their own conduct after they had learnt about the Transfers.

173. When the plaintiffs first learnt about the Transfers in September 1997, they did not take any action against the 1^st defendant forthwith.  Mr Meng said under cross-examination, he took advice from another lawyer friend about the matter and was told that it was the normal practice of Hong Kong lawyers.  That is incredible.

174. When the plaintiffs attempted to recover HK$20,000,000 in November 1997, they did not make any complaint against either the 1^st defendant or the 3^rd defendant.  It does not make sense.  Mr Meng said that the 2^nd defendant asked them to wait for until 3 January 1998, that is, after the six months period under the Agreement expired.  And the plaintiffs waited accordingly.  But the 2^nd defendant had already acted in fragrant disregard of the plaintiffs’ instructions, why would Mr Meng believe him further?  Why would the plaintiffs not take action against the 1^st defendant or the 3^rd defendant right away, especially when they were in need of money?  When the deadline was passed, the money that the plaintiffs asked for was not forthcoming, the plaintiffs did not take any action.  Again, that is incredible.

175. The Cancellation Agreement, the contents of which Mr Wang had confirmed to be accurate, simply did not support the plaintiffs’ version of the events.

176. During the recovery process, the plaintiffs were still relying on the 1^st defendant to pursue the matter against other defendants.  It is incredible when it was the 1^st defendant’s wrongful transfer that caused their loss in the first place.

177. In the 20/4/98 Letter [Meng to D2]23, Mr Meng said that the problem relating to the plaintiffs’ capital contributions in the Project had adversely affected the 1^st defendant’s reputation.  But Mr Meng fell short of complaining about the Transfers.  That is incredible. 

178. Mr Aiken conceded that all the letters written by the 1^st defendant to the 3^rd defendant during the recovery process were issued

with the plaintiffs’ instructions.  One of these letters was the 21/4/98 Letter [D1 to D3]24.  According to this letter, the plaintiffs would not have instructed the 1^st defendant to stakehold the Contributions.

179. In none of these correspondence exchanged between the plaintiffs and the 3^rd to 6^th defendants during the recovery process was it said that the Transfers to the 3^rd defendant were wrongful.  Indeed, Mr Wang made no complaint that the Transfers were wrongful at all in the 10/6/98 Letter [P3 to D3 & D4]25.  The 4^th defendant put forward his own version of the events by the 6/7/98 Letter [D3 to D1]26.  There is nothing in the plaintiffs’ correspondence to contradict it. 

8.6     Rejecting the stakeholder claim

180. For the above reasons, I find all the plaintiffs’ witnesses poor and unreliable.  I reject their evidence as summarised in paragraphs 140 to 143 above. I further rule that the plaintiffs’ evidence is so unsatisfactory that there is no case to answer on the Stakeholder Claim.  The Stakeholder Claim must fail and I dismiss it accordingly.  It follows that the questions of breach under the Stakeholder Claim and quantum do not arise.

181. Before leaving the Stakeholder Claim, I wish to make one more observation.  The evidence of the plaintiffs’ witnesses and the way they gave their evidence left me with the impression that the plaintiffs were laboured under the misconception that as the plaintiffs’ lawyers in respect of the Project, the 1^st defendant was responsible for the entire Project and all the loss that they had suffered when it fell through.  That is perhaps the reason why they first came up with the Stakeholder Claim and then tried to expand the 1^st defendant’ role as guarantor, operator and stakeholder of the entire Project.  They have gone over the top.

SECTION 9    THE NEGLIGENCE CLAIM

182. I next come to the Negligence Claim.

9.1     What instructions did the plaintiff give the 1^st defendant?

183. I need first to ascertain what exactly had the plaintiffs instructed the 1^st defendant to do.

184. As noted, 1^st defendant had been instructed to draft the Agreement.  But obviously the plaintiffs’ instructions were not so limited.  The evidence clearly shows, and I so find, that the 1^st defendant had been instructed to handle and process the plaintiffs’ contributions to the 7^th defendant under the Agreement, including sending the contributions to the 3^rd defendant, who acted for the 5^th and 6^th defendants, the plaintiffs’ joint venture partners.  Further, I find that the 1^st defendant had been instructed to protect the plaintiffs’ interest in the moneys.  That is why it imposed on the 3^rd defendant the Undertaking in the 18/6/97 Letter [D1 to D3]27 and the Covering Letters [D1 to D3]28 in respect of each of the Transfers.  The position is made beyond doubt by the 27/6/97 Letter [D1 to P3]29 in which the 1^st defendant specifically stated that in order to protect the 3^rd plaintiff ’s interest, it would impose the Pre-Condition in respect of the 2^nd to 6^th Transfers.

185. What duties would arise from the above instructions that the plaintiffs gave to the 1^st defendant?

9.2     The relevant circumstances

186. The above question has to be answered by reference to the relevant circumstances.  The following factors are, in my view, pertinent.

A.      The plaintiffs’ reliance on the 1^st defendant

187. The evidence shows that the plaintiffs had previous experience in buying real properties.  But it was the first time they engaged in a project of this size and nature.  Their officials all came from the Bureau in Hebei Province.  And it is not unreasonable to assume that they had certain knowledge and experience in financial matters.  But there is no evidence to suggest that they were conversant with the Hong Kong real estate market.  In the circumstances, it is only reasonable that they would look to the 1^st defendant to protect its interest in the Contributions they made to the 7^th defendant.  And I so find.

B.      The 1^st defendant’s knowledge at the time

188. There is no evidence to suggest that the 1^st defendant was aware of the Acquisition Formula at the time.  Indeed, the documents containing the Acquisition Formula was only disclosed upon my order made in the course of the trial.

189. However, the 1^st defendant obviously knew the following matters.  Under the Agreement, the plaintiffs were the majority shareholder, having control of the board and hence the daily operations of the 7^th defendant.  The 3^rd defendant was acting for the 5^th and 6^th defendants, the plaintiffs’ joint venture partner in the Project.  The 3^rd defendant was also acting for the purchaser in connection with the acquisition of the units in Happy Mansion, although it was not aware of the identity of the purchaser being Start Orient until 20 April 1998 when Mr Cui gave a copy of the purported sale and purchase agreement of 12/F of Happy Mansion to Mr Chan.  The sale of the units in Happy Mansion would take the form of conditional sale and purchase agreements.  Hence the need to impose the Undertaking and the pre-Condition as proposed in the 27/6/97 Letter [D1 to P3].

C.      Who acted for the 7^th defendant?

190. The Contributions were meant to be the plaintiffs’ capital contributions to the 7^th defendant.  Under Clause 11.3(c) of the Agreement, the contributions were to be processed and settled through law firms practising in Hong Kong.  Thus who was then acting for the 7^th defendant should be a matter of concern to the 1^st defendant when it handled the Contributions.

191. I have already found that there is no evidence to establish the identity of the law firm that acted for the 7^th defendant.  I also find that there is no credible evidence to enable the 1^st defendant to be reasonably satisfied that the 3^rd defendant was acting for the 7^th defendant when the Transfers were made.  There was no board resolution from the 7^th defendant to that effect.  (In any event, the 3^rd defendant could not have acted for the 7^th defendant in respect of the 1^st Transfer (on 18 June 1997) because the shares in the 7^th defendant were not formally transferred to the 3^rd plaintiff and the 6^th defendant until 3 July 1997.)  And the 1^st defendant had not come up with any evidence to show that it could be so reasonably satisfied.

D.      The foreseeable risk about the plaintiffs’ contributions

192. In my view, the risk that the plaintiffs’ capital contributions to the 7^th defendant received by the 3^rd defendant who was then acting for the plaintiffs’ joint partners of the Project, namely, the 5^th and 6^th defendants, might not be utilised in accordance with the plaintiffs’ instructions or in their interest was reasonably foreseeable : see Edward Wong Finance Co. Ltd v. JSM (a firm) [1984] 1 AC 296, per Lord Brightman at p.306F-G.  The 1^st defendant was obviously aware of such a risk.  Otherwise, it would not have imposed the Undertaking or proposed to impose the Pre-Condition on the 3^rd defendant.

9.3     The duties entailed and the 1^st defendant’s breach

193. In these circumstances, imposing the Undertaking on the 3^rd defendant is not sufficient security to protect the plaintiffs’ capital contributions to the 7^th defendant.  The 1^st defendant was under a duty to take possible steps to guard against such risks : Edward Wong Finance, per Lord Brightman at p.307G.  That involved at least a duty to advise the plaintiffs properly of the risks involved in sending their contributions to the 3^rd defendant and the possibility of other better, safer options to avoid such risks without frustrating the business objectives of the Project.

194. Mr Hoo submitted that a solicitor’s principal advisory obligation does not extend to questions of business : Clark Boyce v. Mouat [1994] 1 AC 428, per Lord Jauncey of Tullichettle at 437D-E.  He further submitted that to impose on a solicitor the legal responsibility of answering business questions would require both unequivocal instructions and unqualified acceptance; for it is no part of a solicitor’s normal duty to profess the skill and experience for giving such advice : Yager v. Fishman & Co. and Teff & Teff [1944] 1 All ER 552, per Scott LJ at p.555G.

195. The present case, in my view, does not involve any advice on the commercial wisdom or business questions of the Project or the financial strength of the plaintiffs’ joint venture partners.  It involved the risks that the plaintiffs would be exposed if they were to make the capital contributions by forwarding the same to the 3^rd defendant in the circumstances that I have identified above.  In exercising reasonable professional judgment a solicitor is expected to be alert to risks which might elude an intelligent layman and to advise the client of those risks or explore the matter further : County Personnel Ltd v. Alan R Pulver & Co. (a firm) [1987] 1 WLR 916, per Bingham LJ at p.922D-E.  For it is the solicitor and not his client who has the better opportunity to assess the gravity or remoteness of the risks involved in a particular case, and it is the solicitor and not the client who has the necessary expertise to analyse and guard against the risks : see Edward Wong Finance, per Lord Brightman at p.307G.

196. Where a client sues his solicitor for having negligently failed to give him proper advice, he must show :

(1)     what advice should have been given; and

(2)     on a balance of probabilities, that is such advice have been given he would not have entered into the relevant transaction or would not have entered into it on the terms he did.

See Downs v. Chappell [1997] 1 WLR 426, per Millet LJ (as he then was) at p.11B, followed in Bank of China (Hong Kong) Ltd v. Albert Hwang, David Chung & Co. (a firm), unreported, 6 June 2002, [2002] 687 HKCU 1, Deputy Judge Lam (as he then was).

197. On (1), I have already ruled that the 1^st defendant should have advised the plaintiffs of the risks involved in sending their capital contributions to the 3^rd defendant and the possible steps to avoid such risks without frustrating the business objectives of the Project.  Such steps, in my view, include causing the 7^th defendant, which was under the plaintiffs’ control, to open a bank account.  The plaintiffs’ contributions to the 7^th defendants could be deposited with this account.  The plaintiffs’ moneys would then be under the plaintiffs’ control through the 7^th defendant.  They could not be utilised without the plaintiffs’ consent.  This would on the one hand fulfil the plaintiffs’ obligations under the Agreement to make contributions to the 7^th defendant and, on the other, ensure that their contributions were to be applied in accordance with the business objectives of the Project with the plaintiffs’ consent and under their control.

198. On (2), I am satisfied on a balance of probabilities that had the 1^st defendant given such advice to the plaintiffs, they would not have sent their contributions to the 3^rd defendant in the way as they had done.  Opening a bank account by the 7^th defendant was obviously a far better, safer and viable option.

199. The 1^st defendant had failed to properly advise the plaintiffs of the above matters or at all.  Such failure fell well below the skill and standard required of a reasonably competent solicitor.  The 1^st defendant is clearly guilty of negligence.  And I so find.

200. This is sufficient to dispose of the liability of the Negligence Claim.  I do not wish to overburden this judgment.  So I will not deal with other particulars of negligence relied on by the plaintiffs except to note one point.  In his closing submissions, Mr Aiken sought to rely on other particulars of professional negligence which had not been pleaded.  This is, with respect, not permissible.  To complete the discussion, Mr Hoo’s no case submission on the Negligence Claim is rejected.

9.4     Quantum

201. On quantum, the plaintiffs had been unable to recover the balance of the Contributions, namely, HK$36,600,000.  This balance includes the sum of HK$800,000 kept by the 1^st defendant after it had returned HK$400,000 from the HK$1,200,000 that it had retained.  This sum of HK$800,000 forms the subject matter of the Residue Claim, which I will deal with in a moment.  Thus, on the Negligence Claim, the loss that the plaintiffs had suffered as a result of the 1^st defendant’s negligence is HK$(36,600,000 – 800,000) = HK$35,800,000.

SECTION 10  THE RESIDUE CLAIM

202. I now come to the Residue Claim.

203. I first look at the sum of HK$500,000 retained by the 1^st defendant to defray its fees.  Retaining the sum is contrary to the 1^st defendant’s own case that the Contributions were to be forwarded to the 3^rd defendant.  If the 1^st defendant wished to retain the sum as costs on account, it should have obtained the plaintiffs’ consent beforehand.  But there is simply no evidence to suggest that the 1^st defendant had done so or was in any event entitled to retain the sum for such purpose.

204. On the HK$300,000 paid to Mr She, it is again inconsistent with the 1^st defendant’s case that it had been instructed to send the Contributions to the 3^rd defendant.  There is no evidence to show that the 3^rd plaintiffs had authorised the 1^st defendant to make the payment of HK$300,000 to Mr She either.  Further, the 1^st defendant’s own document does not support its plea.  Its defence alleged that the payment was compensation to Mr She for the opening of office premises for the 7^th defendant and employing a person to man the same.  But the relevant cheque voucher shows that it was commission for the Project30.  So which is which?  This clearly calls for an explanation from the 1^st defendant but there is none, the 1^st defendant having elected not to give evidence.

205. In the circumstances, I find for the plaintiff in the sum of HK$800,000 on the Residue Claim as narrowed.  Again, for completeness, Mr Hoo’s no case submission on this Claim is rejected.  

SECTION 11  THE CLAIM AGAINST THE 3^RD DEFENDANT

206. I now come to the plaintiffs’ claims against the 3^rd defendant.  I first dispose of the two preliminary points raised in counsel’s submissions.

10.1   Who is the proper plaintiff?

207. Mr Lam submitted that only the 3^rd plaintiff is the proper plaintiff insofar as the 3^rd defendant is concerned.  I agree.  For the Transfers, received by the 3^rd defendant, were meant to be capital contributions the 3^rd plaintiff made to the 7^th defendant.  Only the 3^rd plaintiff has the locus to sue for their return from the 3^rd defendant.

10.2   Any proper defence filed by Mr Ho?

208. Mr Aiken queried if Mr Ho had filed a proper defence.

209. The 3^rd defendant was sued in the name of the firm pursuant to Order 81, rule 1 of the Rules of the High Court.  Mr Ho, the 4^th defendant and Mr Emerson were named as partners of the 3^rd defendant at the material times.  Under Order 81, rule 4(1), where persons are sued as partners in the name of their firm, which is the case here, service may not be acknowledged in the name of the firm but only by the partners thereof in their own name.  Mr Lam took the view that the original acknowledgment of service filed in the 3^rd defendant’s name is inappropriate.  He applied for an obtained leave from me for Mr Ho and Mr Emerson to file new acknowledgement of service on 23 April 2004.  When the 3^rd and 4^th defendants were represented, they filed the Joint Defence on 15 February 2000.  Mr Ho, now represented by Mr Lam, is entitled to file a new and separate defence but he did not.  The Joint Defence remained his defence.  And the trial had been conducted on this basis throughout.  I am unable to agree with Mr Aiken on this point.

10.3   The pleading point

210. Mr Lam then took a pleading point.

211. He submitted that the plaintiffs’ pleaded cause of action against the 3^rd defendant could only succeed if the 18/6/97 Letter [D1 to D3] and the Covering Letters [D1 to D3], which imposed the Undertaking on the 3^rd defendant, were issued to the 3^rd defendant with the authority of the 3^rd plaintiff.  However, it is the plaintiffs’ pleaded case is that the Transfers were made without their consent or authority.  Mr Wang also confirmed in his oral testimony that the 18/6/97 Letter [D1 to D3] and the Covering Letters [D1 to D3] were all written by the 1^st defendant without the plaintiffs’ instruction or authority.  The plaintiffs had not pleaded any alternative cause of action against the 3^rd defendant to cover the scenario where the court might hold that the Transfers were made with the plaintiffs’ consent and authority.  Thus, on their own pleadings, the plaintiffs’ claim must fail.

212. In Poon Hau Kei v. Hsin Chong Construction Co. Ltd & another [2004] 2 HKLRD 442, Bokhary PJ said at para.19 at p.452A-B :

“Provided that it does so in a fair manner, a court is entitled to decide in favour of a party on the basis of a scenario that he has not pleaded but his opponent has pleaded…”

213. It is true that the plaintiffs had not pleaded any alternative case against the 3^rd defendant on the basis that the Transfers were made with their consent or authority.  But that remains the 1^st defendant’s pleaded case.  And before the striking out of the sham defence31, it was also the 3^rd defendant’s defence.  For in paragraph 34 of the Joint Defence, it was alleged that the plaintiffs knew that the capital contributions were meant to be a general-purpose loan.  The implication must be that the plaintiffs had consented to the Transfers being made to the 3^rd defendant.

214. Further, throughout the trial, Mr Ho has adopted a neutral stance over the factual disputes between the plaintiffs and the 1^st defendant, including whether the Transfers were made with the plaintiffs’ knowledge consent and authority.

215. In these circumstances, it would not be unfair for me to determine Mr Ho’s liability on the basis of my earlier finding that the Transfers were made with in accordance with the plaintiffs’ instructions.

10.4   Whether Mr Ho vicariously liable

216. I then turn to the merits of Mr Ho’s defence.

217. The plaintiffs’ claim is essentially based on the Undertaking.  In the Joint Defence, it was admitted that the Transfers had been made to the 3^rd defendant.  The undisputable evidence is that the 3^rd defendant was well aware that the Transfers were moneys of the 3^rd plaintiff.  When each of the 1^st to 6^th Transfers was made, the 1^st defendant had imposed the Undertaking on the 3^rd defendant.  The 3^rd defendant must have accepted the Undertaking.  Otherwise, it should have informed the 1^st defendant accordingly and returned the moneys.  The 3^rd defendant is bound by the Undertaking.  So is Mr Ho : see generally The Hong Kong Solicitors’ Guide to Professional Conduct Vol. 1, Chapter 14, para.14.01.

218. By accepting the Undertaking, the 3^rd defendant owed a duty to the 3^rd plaintiff, the principal of the 1^st defendant who imposed the Undertaking, to act in accordance with the Undertaking.  When the moneys it received by way of the Transfers were dispersed in breach of the Undertaking, the 3^rd defendant is liable.  So is Mr Ho.

219. Alternatively, Mr Ho is vicariously liable in the following way.

220. Section 12 of the Partnership Ordinance, Cap.38, provides :

“Where, by any wrongful act or omission of any partner acting in the ordinary course of the business of the firm or with the authority of his co-partners, loss or injury is caused to any person not being a partner in the firm, or any penalty is incurred, the firm is liable therefor to the same extent as the partner so acting or omitting to act.”

221. Two essential conditions must be satisfied under section 12 :

(1)     The act of the partner concerned was wrongful.

(2)     The act was carried out by the partner acting in the ordinary course of the business of the firm or with the authority of his co-partners.

222. On (1), Mr Lam readily accepted that the 4^th defendant’s dispersing of the moneys received by virtue of the Transfers constituted a wrongful conduct within the meaning of section 12.

223. On (2), the question of authority does not arise in the present case, the plaintiffs having made no complaint against Mr Ho personally.  The only question is whether the wrongful act of the 4^th defendant was committed in the ordinary course of the 3^rd defendant’s business.  Mr Lam submitted that it was not.  The 4^th defendant was engaging on a frolic of his own.

224. In order to determine what is meant by “acting in the ordinary course of business”, the courts now adopt a “close-connection” test : Dubai Aluminium Co. Ltd v. Salaam [2003] 2 AC 366, per Lord Nicholls at pp.376-378.  The “close-connection” test for determining vicarious liability has been adopted by the Court of Final Appeal in Ming An Insurance Co. (HK) Ltd v. Ritz Carlton [2002] 3 HKLRD 844 in the context of employer’s liability.  Both Litton NPJ (at p.856G) and Mortimer NPJ (at p.862J) emphasised that the application of the “close-connection” test to the facts of a particular case is a matter of degree.

225. I have already found that the 3^rd defendant acted for the 5^th and 6^th defendants and Start Orient in respect of the Project32.  On the evidence, there can be no dispute, and I so find, that the Project was handled by the 4^th defendant in the ordinary course of the 3^rd defendant’s business.  He also handled the moneys received by the 3^rd defendant by way of the Transfers.  Mr Ho chose not to give evidence to explain why it was the 4^th defendant who handled the Project and the moneys.  The only reasonable inference to be drawn, and I so draw, is that the 4^th defendant had been entrusted and hence authorised to handle the moneys in the course of the 3^rd defendant’s business.  When he dishonestly dispersed the monies, Mr Ho as his co-partner was vicariously liable.

226. This is sufficient to dispose of the plaintiffs’ claims against Mr Ho.  And I do not propose to deal with other contentions raised by Mr Lam.

10.5   Quantum

227. Turning to quantum, Mr Lam accepted that the proper quantum of damages against Mr Ho is HK$36,600,000.  I note that the plaintiffs’ claim against Mr Emerson has been settled.  But I have not been asked to take that into account when assessing the quantum of damages to be awarded against Mr Ho.  I trust I can safely leave this to the parties to be dealt with at the enforcement stage.

SECTION 11  ORders & COSTS

228. As against the 1^st defendant, I have already dealt with the quantum on the Negligence Claim and the Residue Claim in paragraphs 201 and 205 above.  The total loss suffered by the plaintiffs is, therefore HK$36,600,000.  Mr Hoo suggested that I should give credit to the proceeds generated by the mortgages relating to the Profit Mansion properties.  But as I have pointed out, that transaction is a now a subject matter of another High Court Action.  It is more desirable to leave that matter aside for the time being.  Accordingly, I will enter judgment against the 1^st defendant in favour of the plaintiffs in the sum of HK$36,600,000 with interest at judgment rate from the date of writ until payment.

229. As against Mr Ho, I will enter judgment against him in favour of the 3^rd plaintiff in the sum of HK$36,600,000 with interest from the date of writ until payment.

230. The 4^th defendant having filed no substantive defence to the 1^st plaintiff’s claim on the dishonoured cheque, there will be judgment in favour of the 1^st plaintiff against him in the sum of HK$10,000,000 with interest at the judgment rate form the date of writ until payment.

231. The claim against the 5^th defendant is on 6 dishonoured cheques issued in favour of the 1^st plaintiff.  The 5^th defendant has not filed any defence.  There will be judgment in favour of the 1^st plaintiff against the 5^th defendant in the sum of HK$30,000,000 with interest from the date of writ until payment.

232. The 6^th and 7^th defendants have not filed any defence either.  There will be judgment against them in favour of the plaintiffs in the sum of HK$36,600,000 with interest at judgment rate from date of writ until payment.

233. Finally, on costs, I agree with the parties that it is a complicated matter.  I will therefore invite the parties to agree on costs if possible, failing which they should lodge with court their written submissions on costs 42 days after handing down of this judgment.  If necessary, I will ask the parties to make further oral submissions.

1     On 18/6/97, 10/7/97 and 11/7/97, the actual amounts applied for remittance were respectively HK$5,000,000, HK$3,800,000 and HK$4,700,300.  But the amount actually received by the 1^st defendant was on each occasion HK$100 short because for each bank remittance, the bank charged HK$100 as handling charge, totaling HK$300.  The HK$300 added to the remittance of HK$4,700,000 on 11/7/97 made up for the total shortfall.

2   The Acquisition Formula was drafted in Chinese, which read :

“方案是以港幣 70,000,000.00作收購訂金，由我方公司與貴公司簽訂收購合約，在六個月內動用資金作全面收購，六個月內若不能收購成功，資金會全數退回，該款項將放於律師樓內，每次動用該款項時，我司必需交出有效之「有條件買賣合約」予律師樓批核方可發放訂金，而每筆訂金皆可在不能全面收購時，六個月內或之前退回律師樓，而小業主之律師樓在法律上要自動承擔此柒仟萬元訂金，實為總地價貳億陸仟萬元之約27%。收購會用「有條件合約」方式收購，即每伙每戶業主均同意出售物業方可正式由律師事務處取得訂金，否則所有訂金均由律師看管，不能動用。

在順利全面成功收購後，會同時訂立法律文件在指定時間內完成交易，交易期要在收購時再確定，估計由簽訂臨時有條件合約內計起，最多不超過六個月完成交易。(香港房地產之買賣合約、訂金之管理及發放一直以來皆依賴律師樓的管理，制訂及操作，而律師的責任是由香港政府法例管制)”

3   The Agreement was drafted in Chinese.  The summary is taken from the English translation.

4   The Cancellation Agreement was drafted in Chinese.  The terms set out below are taken from its English translation.

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