MAGIC SCORE LTD v.THE HONGKONG AND SHANGHAI BANKING CORPORATION LTD AND ANOTHER

HCA 11077/1994

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 11077 OF 1994

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REASONS FOR DECISION

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1.  On 8 June 2006, I ruled that certain parts in the Plaintiff’s Re-amended Statement of Relief and Damages and the Plaintiff’s Reply to 1^st Defendant’s Statement of Case pertaining to the claim for exemplary damages should be struck out.  I also made a similar ruling with regard to certain pleadings regarding allegations of dishonesty or fraud.  These are the reasons for those rulings.

2.  I shall also dispose of the 1^st Defendant’s application to strike out some other paragraphs in those pleadings with regard to rescission and pecuniary rescission.

3.  I would mention at the outset that I am indebted to Mr McGhee QC and Mr Jarvis QC for guiding me through these applications.  Neither of them were involved in this action before Waung J gave judgment on liability.

Relevant history of the action

4.  The background of the case is set out in the judgment of Waung J of 19 July 2005 [“the Liability Judgment”].  I see no need to repeat the same here.

5.  However, in order to understand my reasons, it is necessary to recite some history of these proceedings.  The Writ in this action was issued on 3 November 1994.  At that stage, there were four defendants, including Bethleham Management Limited [“BML”], the purchaser of the Property in question under the sale and purchase agreement of April 1987.  The relief claimed include general damages, and three declaratory relief, one of which is a claim for declaration against BML that the assignment of the Property is void and of no effect.  In substance, it sought to set aside that transaction vis-à-vis BML.

6.  Shortly after the commencement of the action, the Defendants applied for the striking out of the claim.  From the affirmations filed in support of BML’s application, BML’s case was that it was a bona fide purchaser for value without notice and whatever wrongdoing alleged against the 1^st and 2^nd Defendants could not affect BML.  The application succeeded on 17 May 2005 before Master Jones.  There was no appeal against that order.  BML ceased to be a party to this action.  Whilst the Master also struck out the Statement of Claim against the 1^st and 2^nd Defendants, leave was granted to the Plaintiff to file a new Statement of Claim against them within 42 days.

7.  A new Statement of Claim against the 1^st and 2^nd Defendant was filed on 27 June 1995.  The prayers included claims for an order that the sale be rescinded or alternatively a declaration that the sale ought to be rescinded and further if such rescission was not possible, damages in lieu of rescission.  In addition, there was a claim for general damages.  As mentioned, BML was no longer a party and the claim for rescission was not a claim for setting aside the transaction as between the Plaintiff and BML.  I shall explain later how Mr McGhee argued on behalf of the Plaintiff that it would still be meaningful to advance a claim for rescission in these circumstances. 

8.  Mr Javis submitted that a claim for general damages is inconsistent with rescission plus damages in lieu of rescission.  The Plaintiff should therefore be required to elect from them.  He also submitted that an election had indeed been made at the next version of the Statement of Claim.

9.  On 16 November 1998, the Plaintiff amended the new Statement of Claim.  The only substantive relief claimed were damages or inquiry into what damages Electronics has suffered by reason of the Bank’s breach of the fiduciary duty and by reason of the undue influence and/or economic duress exerted by the Bank.  The claim for rescission and damages in lieu of rescission disappeared, hence Mr Javis’ contention of election.

10.  By then, the Plaintiff was represented by the same firm of solicitors as it is today.  Mr McGhee was unable to give this court specific reason for such amendments apart from suggesting that it might be due to a new perception of the case by a new team of lawyers.

11.  Further amendments to the Statement of Claim were made on 17 September 2001.  Those amendments added (1) a claim for damages or inquiry into damages for concealment of the Bank’s association with or connection to BML and the Ho family; and (2) a claim for aggravated damages.

12.  Finally, on 3 December 2002, another set of amendments deleted the general claim for damages and inquiry as to damages altogether. In its place, there were two claims for specific amount by way of damages for loss of rise in value of the Property and loss of net income from the Property by reference to different dates.

13.  This final version was the version that was before Waung J when the order for split trial was made on 15 January 2004.  The Trial on Liability was also conducted by reference to this final version.

14.  As Mr Javis submitted, throughout the history of the pleadings prior to the Liability Judgment, there had not been any allegations of fraud or dishonesty pleaded against the Bank or any of its officers.  Neither had there been any claim for exemplary damages.  The only claim the Bank faced at the beginning of the trial was one for damages specifically pleaded and aggravated damages.

15.  The question of split trial was first raised by Waung J at the pre-trial review in December 2003.  There was no application for trial of preliminary issues.  Waung J ordered trial on liability in advance of the trial on quantum.  Given the prayers in the final version of the Statement of Claim, the question of quantum was primarily a question of assessment although Mr Fok for the defence raised the possibility of statutory insolvency set off (see Paragraph 7 of the Judgment of 15 January 2004).  There was nothing before Waung J to suggest that the Plaintiff would seek to extend the scope of its claims to ask for exemplary damages or pecuniary rescission.  Nor was there any suggestion that fraud and dishonesty would be relied upon at the assessment of quantum.  It is to be noted that by then parties should have filed all evidence on quantum since the matter was originally listed for trial of everything starting in February 2004.

16.  However, in the Liability Judgment, the split has been changed.  It became a split between Liability on the one hand and Remedies and Relief on the other. 

17.  Further, instead of sticking to the original pleadings, further pleadings were filed for the Trial on Relief and Remedies pursuant to the directions of Waung J on 12 September 2005.  The further pleadings filed by the Plaintiff raised substantial new heads of claims.  These are the pleadings that form the subject matter of the present strike out applications.

18.  The way in which the matter have proceeded led to two problems that I have raised with counsel in the course of hearing,

(a)

Whether it is permissible for the Plaintiff to extend the scope of the claims substantially in the Statement of Damages and Relief without any amendments to the Statement of Claim;

(b)

If leave to amend is required by way of adding the new claims to the Statement of Claim, one highly relevant consideration is litigation prejudice that would be suffered by the Defendant if leave were granted.  For that consideration, it is important to identify the precise limits to which the findings, observations and comments by Waung J in the Liability Judgment are binding or even if not binding, how relevant they were to Stage II of the trial.  As there is no clear dichotomy between the issues of liability and that of relief and remedies, this present a problem.  To an extent, due to developments after the Liability Judgment that could not have been contemplated by Waung J when the order for split trial was made, Stage I has become a trial on preliminary issues without having the issues precisely formulated.

The need to plead the allegations in the Statement of Claim and the Plaintiff’s failure to do so

19.  The answer to the first question lies with the rules relating to pleadings.  Order 6 Rule 2 requires a writ be endorsed either with a statement of claim or a concise statement of the nature of the claim made or the relief or remedy required.  Order 18 Rule 15 requires a statement of claim to state specifically the relief or remedy which the plaintiff claims.  Further it cannot raise a cause of action not mentioned in the writ nor arises from facts giving rise to the cause of action so mentioned.

20.  Thus, it is not appropriate to raise in the reply a new cause of action (see Hong Kong Civil Procedure 2006 Paragraph 18/3/2).  A plaintiff who wishes to pursue an additional or alternative cause of action should do so by amending the statement of claim.

21.  This is not simply a technical rule.  A defendant to an action is entitled to know from the writ and statement of claim what are the precise limits of claims he is faced with.  He should focus on the same and then put forward his case in his defence and prepare for the evidence accordingly.  He should be able to conduct the litigation and arrange his affairs on the basis that all the relief and remedies claimed against him have been set out in the statement of claim, subject to any amendments that might be made to that document.  He could, for example, consider whether to make any payment into court or any offer for settlement based on this.  He could also decide what is the proportionate time and costs that he should spend on the litigation by reference to those claims.  A reply (or any subsequent pleadings) is not the right place for new claims to be put forward as it does not contain any prayers and a defendant does not have any automatic right to file any pleadings subsequent to reply (see Order 18 rule 4).  It would also be confusing for new claims to be buried amongst other positive allegations made in genuine reply to a defence.  

22.  In the present case, the trial on liability was conducted on the basis of claims pleaded in the final version of the Statement of Claim.  Although the rules permit the court to grant leave for further pleadings to be filed after the reply (Order 18 rule 4) and such further pleadings could encompass pleadings for inquiry as to damages, such leave cannot negate the requirement under Order 18 Rule 15.  I have not been taken to the rationale behind the directions of Waung J on 12 September 2005.  There is however nothing before me that suggests Waung J intended to give the Plaintiff an opportunity to expand on their existing claims pleaded in the final version of the Statement of Claim or to add new claims to the action by giving such directions.

23.  In my judgment, if the Plaintiff wishes to claim any relief or remedies that have not been included in the final version of Statement of Claim, it has to apply for leave to amend the same instead of pleading those in the Statement for Relief and Damages.  Mr McGhee indicated in his written submissions that the Plaintiff would ask for leave to amend if the court considers such a course necessary.

24.  At the outset of the hearing, in the light of Mr McGhee’s position, I indicated that I would proceed as if an application for leave to amend was before me by way of alternative to the primary resistance to the application for striking out.

25.  Exemplary damages are clearly new claims that have not been advanced in the final version of the Statement of Claim.  It has to be specifically pleaded (see Jacob & Goldrein, Pleadings: Principle and Practice at p.90; Order 18 Rule 8(3)).  Even in a split trial situation, it should be pleaded at the outset in order to enable the judge who tried liability to form a view on the flagrancy of the defendant’s wrongdoing so that appropriate directions could be given to the master or the judge who conducted the inquiry as to quantum.  The reason why such a task has to be performed by the judge who tried liability is that in most cases, the evidence relating to such flagrancy is the evidence that the judge would assess in relation to liability.  If no direction is given and if the issue of flagrancy turns on the same evidence, there is a risk of inconsistent findings at different stages.  The existence of such a risk may militate against ordering a split trial and the judge should take this into account.

26.  In Paragraph 23 of the Re-Amended Statement of Relief and Damages the Plaintiff sought exemplary damages by reason of (a) the Bank acted in cynical disregard of its fiduciary duties to Electronics and Electronics’ right not to sell the Property and likely adverse effect of the sale on Esquire; and (b) the Bank was motivated by the desire to secure for itself the net proceeds of sale and/or the desire to procure the transfer the Property to BML to further its good relationship with the Ho Family.  Particulars of these allegations were given on 20 December 2005.  Several senior officers of the Bank were implicated.  These allegations were intimately connected with the allegations of deliberate concealment put against the Bank at the trial on liability but they were expanded to a substantial degree.  One can see that there would be substantial overlapping in the evidence and the issues are intertwined.  In my judgment, all these have great significance in the consideration of litigation prejudice that I will consider below.

27.  Rescission and pecuniary rescission are again nowhere to be found in any of the prayers in the final version of the Statement of Claim.  If the Plaintiff wishes to seek relief by reference to the equitable doctrine of rescission or pecuniary rescission, it should be pleaded in Statement of Claim.

28.  The allegations of fraud and dishonesty are slightly different.  Mr McGhee was at pains to highlight that the Plaintiff is not advancing fraud and dishonesty as a cause of action.  However, the Plaintiff did use the words ‘fraud’ and ‘dishonest’ in its pejorative sense to describe the wrong committed by the Bank.  The purposes of the Plaintiff in advancing such serious allegations are three folded,

(a)	To persuade this court to adopt a less stringent test of causation: the Plaintiff will contend that the “but-for” test shall not be applied by reason of the fraudulent and dishonest conducts on the part of the Bank;
(b)	To persuade this court to adopt a wider test of remoteness which is not limited to foreseeability;
(c)	To persuade this court to award compound interest.

29.  Counsel had an interesting debate at the hearing on the utility of these three propositions on the facts of the present case.  For reasons that would become apparent, I do not find it necessary to rule on the same.  Suffice to say by reference to the authorities cited by Mr McGhee and his oral submissions, the Plaintiff intends by these serious allegations to impute a very high degree of moral turpitude against the Bank officers concerned.  The Plaintiff is not content with merely relying on a case of equitable fraud.

30.  By way of illustration, the Plaintiff wishes to rely on the approach on remoteness of damages applied in Smith New Court Securities v Citibank  [1997] AC 254 regarding fraudulent misrepresentation and extended the same to the equitable wrongs and breach of fiduciary duties committed by the Bank.  Doyle v Olby [1969] 2 QB 158 was endorsed by the House of Lords as correctly stating the law regarding the measure of damages for fraudulent misrepresentation.  Of the four points regarded as established in that case by Lord Browne-Wilkinson (p.264H to 265C), the relevant one for our purposes is the principle that damages for deceit are not limited to those which were reasonably foreseeable.  Further down at p.265G, His Lordship referred to measure for fraud as being treated as one in a special category.  At p.279 to 282, Lord Steyn explained the justification for distinguishing between deceit and negligence in the measure of damages.  The Plaintiff now wishes to say that this special rule applies and pleads fraud and dishonesty to support the same even though the liability of the Plaintiff was not established on the basis of fraud.

31.  Putting aside the question whether it is permissible to rely on this rule without advancing a cause of action based on fraud for the time being, it is beyond dispute that the Plaintiff is alleging that the Bank officers are guilty of conducts which are as morally reprehensible as fraud in order to justify the application of the rule by way of analogy or extension.

32.  Allegations of fraud and dishonesty are not to be pleaded lightly.  Although there would be cases where such allegations could have been properly introduced with adequate explanation by way of amendments, it must be extremely rare that the court can permit such allegations to be raised for the first time after judgment on liability has been given.

33.  Mr Jarvis submitted that all litigators treat allegations of these sorts quite differently from other allegations of civil wrongs.  The whole preparation leading to trial would be quite different in terms of the resources and the level of representation to be engaged as well as the witnesses to be called and the conduct of the cross-examination.  Counsel asked rhetorically if the Plaintiff considered that a case on fraud and dishonesty was warranted on the same set of facts, why was it not pleaded in the pleadings before the court at the trial on liability.

34.  On the other hand, Mr McGhee invited this court to examine the allegations in the final version of the Statement of Claim and certain documents exhibited at the trial on liability.  It is submitted that the Bank should know very well that serious allegations were made against it and its officers.  My attention was also drawn to some allegations put to the Bank’s witnesses at the trial.

35.  I do not think Mr McGhee provided any satisfactory answer to the rhetorical question posed by Mr Jarvis.  No explanation has been offered on behalf of the Plaintiff as to why there was no plea of fraud and dishonesty in the final version of the Statement of Claim or the Reply to put the Defendants on notice that such allegations would be made against them in this action.  It does not lie in the mouth of the Plaintiff to say parties contemplated that these could be raised in the second round of pleadings since there was a split trial.  As stated above, the order for split trial was made at the pre-trial review.  The idea of having a split trial was first suggested by the judge, not the parties.  Prior to that, parties were proceeding on the basis that there would be a trial of all the issues and pleadings were closed and evidence was prepared and filed on that basis.

36.  The only difference between the position prior to the trial on liability and the filing of the Statement of Relief and Damages alleging fraud and dishonesty for the first time is the Judgment on Liability.  The connection between the judgment and the plea of fraud and dishonesty is blatantly obvious from the Plaintiff’s own pleadings.  Paragraph 8 of the Re-amended Statement of Relief and Damages is the paragraph providing the substance of the Plaintiff’s allegation of fraud and dishonesty.  I quote,

“	The Bank’s conduct in inducing the sale of the Property was dishonest and/or fraudulent.  In support of this averment the Plaintiff will rely on paragraphs 86, 101, 185, 187, 188 and 234 of the judgment herein.”

I should mention this is not the pleading of Mr McGhee and counsel did say if the court thinks such a plea is defective in form, the Plaintiff would do an amendment giving all necessary and proper particulars.

37.  Putting aside the question of the adequacy of particulars for the time being, I must say this is a most extraordinary way of pleading fraud and dishonesty.  It tantamounts to saying that even though fraud and dishonesty were not pleaded as an issue before Waung J, the findings of the learned judge in those paragraphs in his judgment had established fraud and dishonesty on the part of the Bank and therefore the court should consider the relief and remedies accordingly.  In other words, the Bank has been condemned without knowing that the Plaintiff is going to advance a case of fraud and dishonesty against it.

38.  Whilst Mr McGhee may be correct in saying that the allegations raised in the final version of the Statement of Claim were serious as far as a banker of the standing like the 1^st Defendants is concerned, there is still a considerable gap between such allegations and allegations of fraud and dishonesty.  In Three Rivers DC v Bank of England (No 3) [2003] 2 AC 1 at p.291, Lord Millett made some observations regarding a party’s duty in pleading fraud and dishonesty at Paragraphs 184 to 189.  At Paragraph 185, His Lordship said,

“	… The function of pleadings is to give the party opposite sufficient notice of the case which is being made against him.  If the pleader means ‘dishonestly’ or ‘fraudulently’, it may not be enough to say ‘wilfully’ or ‘recklessly’.  Such language is equivocal.”

39.  Four causes of action were pleaded against the Defendants.  Waung J found liability in respect of three of them established,

(a)	breach of fiduciary duty;
(b)	economic duress;
(c)	undue influence.

40.  The breach of fiduciary duty as found by the judge revolved around the conflict of interests, the concealment of the association with BML and the haste by which the sale was completed.  Even taking into account of the assertion of the interest and desire of the Bank in procuring a quick sale of the Property beneficially in favour of BML in the context of conflict of interest, I do not think a reasonable pleader would regard these allegations as serious as allegations of fraud or dishonesty.

41.  One must not lose sight of the fact that at the material time, Esquire was heavily indebted to the Bank and the Bank could have exercised its power of sale as mortgagee.  Waung J held that this did not exonerate the Bank in terms of liability as it chose proceed to achieve the sale by another route (see Paragraph 80 of the judgment).  But that must have some bearing in considering whether the Bank officers were acting fraudulently or dishonestly.

42.  The crucial findings of Waung J on breach of fiduciary duties are in Paragraphs 83 to 86 of the judgment.  To summarize it in a nutshell, using some of the terminology of Waung J solely for the purpose of convenience, the judge held that a senior partner has no business selling his principal’s property to his junior partner with undue haste in a rising market without disclosing its association with the junior partner to the principal.  The Defendants had some objections to the description of BML as a junior partner of the Bank.  The judge had rejected a submission from the Plaintiff that BML and the Bank were associate or connected party in Paragraph 81.  In my view, the findings of the judge against the Bank cannot be read as equivalent to an imputation of fraud or dishonesty.  If a case of fraud and dishonesty based on the relationship between the Bank and BML had been advanced, I agree with Mr Jarvis that the Bank would probably have adduced much more evidence on the point.

43.  Regarding the causes of action based on economic duress and undue influence, they were pleaded together in some rolled up pleas in Paragraphs 11 to 14 of the final version of the Statement of Claim.  The most serious allegation is the concealment regarding the $30 million discrepancy in the account.  There was actually no concealment about the $30 million discrepancy.  Esquire knew about it and in fact brought this up for discussion with the Bank.  What the Plaintiff really complaint about is the failure of the Bank to admit the same, the concealment from Esquire that the Bank knew it was a mistake on its part and used this to exert pressure on Esquire (see in particular Paragraph 12(2A) and (3) of the Statement of Claim).  It was pleaded that the threats by the Bank were unwarranted, improper and unreasonable.

44.  These pleas have to be considered against the background that the overall indebtedness owed to the Bank was about $270 million and the Bank had a power of sale under the Mortgage.  Exerting undue pressure is one thing.  To elevate that to a case of fraud and dishonesty is quite another matter.

45.  In my judgment, the pleadings before the court up to the trial on liability fail to assert unequivocally a case of fraud and dishonesty against the Bank or its officers.  Given that the trial had been conducted on the basis of those pleadings, the Bank did not envisage that fraud and dishonesty would be raised against it in this action.  In such circumstances, even if fraud and dishonesty were not relied upon as a cause of action, the court should examine with care whether there would be any prejudice caused to the Defendants that could not be compensated by an order for costs before allowing the Plaintiff to raise such serious allegations for the first time at such late stage without any cogent explanation.

Litigation prejudice occasioned to the Defendants if these allegations were allowed to be raised for the first time after the Liability Judgment

46.  Some very strong languages were used by Waung J against the Bank in the Liability Judgment.  By way of illustration, Paragraph 234 of the judgment, being one of those relied upon by the Plaintiff to assert fraud and dishonesty in Paragraph 8 of the Statement of Relief and Damages, criticized the Bank severely.  “… the Bank taking advantage of its ascendancy and dominion over Esquire, by unfair and improper means, coercive and overreaching and deceiving, secured the sale of the Property.  Misrepresentations were made by the Bank.  Lies were told by the Bank.  Threats were uttered by the Bank.  Unilateral actions were taken by the Bank.  In fact the Bank was aware of the impropriety of what it was doing …”

47.  This brings us to the very difficult question of the status of these comments in Stage II of the Trial.  To what extent are they binding on this court and even if they are not binding, what weight could the court give to those criticisms? The answers to these questions have a direct bearing on the issue of litigation prejudice.

48.  At the hearing, in order to deal with the problem identified in Paragraph 18(b) above, Mr McGhee promised to produce a List of Findings in the Liability Trial setting out the issues that the Plaintiff said the Liability Judgment has conclusively determined between the parties. As it turned out, it was not an easy exercise and the List was only produced in the late afternoon of 7 June 2006.  It pinpointed a number of conclusions reached by Waung J in his Liability Judgment with cross-references to the pleadings before the court at that stage.  The Plaintiff contends that these conclusions, subject to the outcome of any appeal, will be binding on the parties (and hence this court) at Stage II.

49.  Apart from these conclusions, Mr McGhee submitted that the other comments or remarks by Waung J in the Liability Judgment were also relevant at Stage II of the trial although this court, after giving due regard and weight to the same, could properly depart from such comments if the evidence at Stage II could justify such departure.  

50.  Mr Jarvis submitted that the position is much more complicated bearing in mind the doctrine of issue estoppel.  Not only would the conclusions be binding, counsel submitted, all necessary steps leading to a particular conclusion would also be binding.  Counsel said it is impossible to draw the line bearing in mind the allegations in the new cases and their interaction with the issues already decided in the Trial of Liability.

51.  For present purposes, I do not think I need to express any final view on what are binding and what are not.  Even on the List submitted by Mr McGhee and his submission on the relevance of the other parts of the Liability Judgment, I am satisfied that if the questions of exemplary damages and fraud and dishonesty were permitted to be raised at Stage II, the Defendants would suffer prejudice that cannot be compensated by costs and it would not be fair to allow such issues to be canvassed.

52.  The conclusive findings in Mr McGhee’s lists include,

(a)	The Defendant had deliberately preferred the interest of the Ho Family over its duty to the Plaintiff;
(b)	The Defendant had deliberately concealed from the Plaintiff its relationship with BML and the Ho Family;
(c)	The Defendant deliberately did not reveal to the Plaintiff that BML was a Ho Family company;
(d)	The Defendant deliberately did not reveal to the Plaintiff that the sale was to the family company of the Ho Family, its junior partner;
(e)	The Defendant deliberately did not reveal to the Plaintiff that the sale was conducted in undue haste without the Property being fully marketed;
(f)	The Defendant knew that the breach of fiduciary duty was unlikely to be discovered for some time and this was the reason for the concealment;
(g)	The Defendant deliberately concealed its knowledge that it was not entitled to the $30 million overcharge from the Plaintiff.

53.  Deliberate concealment was raised as an issue before Waung J in the context of the Limitation Ordinance.  The Plaintiff sought to rely on it to overcome the time bar imposed by the Ordinance.  I agree with Mr Jarvis that the implication of such a plea for the Defendant is substantially different from a plea of deliberate concealment in the wake of allegations of fraud and dishonesty and allegations of cynical disregard of the Plaintiff’s rights.  To permit the Plaintiff to run a case of fraud and dishonesty and a case of exemplary damages with the benefit of these conclusive findings as to deliberate concealment is equivalent to giving the Plaintiff a head start in proving their new cases which should have been advanced in the original pleadings.  Conversely, the Defendant is prejudiced in the defence to these new claims as it had to resist them saddled with the burden of these findings that could have some significance as to the overall assessment of the other allegations pertaining to fraud and dishonesty and exemplary damages.

54.  Finding (f) stated above could also have impact on the claim for exemplary damages.  With (f) established, it would be easier for the Plaintiff to prove that the Defendants’ conduct has been calculated to make a profit for the Bank which may exceed the compensation payable to the Plaintiff.

55.  It is no answer to say the Defendants could adduce further evidence at Stage II.  These findings are said to be conclusive.  Evidence inconsistent with them would not be admissible.

56.  In addition, there are problems as regards the weight and relevance of the other parts of the Judgment.  Reverting back to the example by reference to paragraph 234 of the judgment which is now relied upon by the Plaintiff as particulars of fraud and dishonesty, what evidence does the Defendants need to adduce in order to sway this court from the conclusions of Waung J that lies were told, deception practised, misrepresentations made and the Bank was aware of its wrongdoing in the course of its commission?  Do these remarks create some initial hurdle for the Defendants to overcome?  If so, has the burden of proof been reversed?  If the Defendants were to adduce new evidence shedding light on these matters, should they be required to explain by evidence why such evidence was not tendered before Waung J?  As Mr Jarvis submitted, why should the Defendants be put into such a disadvantageous position when the Plaintiff could and should have pleaded all these matters in the original round of pleadings?

57.  I also accept the submission of Mr Jarvis that had the Defendants been told in the original round of pleadings that the Plaintiff had a case of fraud and dishonesty and exemplary damages in the pipeline, the trial on liability would have been conducted quite differently with more witnesses being called.  Whether Waung J would come to the same conclusions as in his Liability Judgment is something one cannot speculate. The way in which the Plaintiff had pleaded its case had deprived the Defendants of that opportunity.

58.  To provide one illustration, Waung J made some strong findings against Mr Pullen in his Liability Judgment.  Mr Pullen did not give evidence at the Trial on Liability.  There was no hint in the pleadings to suggest that Mr Pullen would be implicated with orchestrating a fraudulent or dishonest scheme against the Plaintiff.  This is the case the Plaintiff now intends to run as shown by the particulars furnished by the Plaintiff under Paragraph 22(1) of the Statement of Relief and Damages.

59.  Mr McGhee reminded this court that the memo of 20 March 1987 had been referred to in Paragraph 12(3) of the final version of the Statement of Claim and at the Liability Trial, allegations implicating dishonesty on the part of Mr Pullen were put by way of cross-examination on Day 18 at p.52-60 of the Transcript.  All these should have given sufficient warning to the Bank that Mr Pullen was an important witness at the Liability Trial.  Counsel also referred to Paragraphs100 to 103 of the witness statement of Mr Gurdas to highlight the Plaintiff’s case as to the Bank’s awareness of the $30 million overcharge at the material time.

60.  With respect, I do not agree that a fair warning of a case of fraud and dishonesty orchestrated by Mr Pullen had been given by the Plaintiff.  Notably, Paragraph 12(3) of the Statement of Claim and in paragraphs 100 to 103 of the statement of Mr Gurdas contained no reference to the memo of 23 October 1986.  Yet, it was the endorsement put by Mr Pullen in that memo that was relied upon at the trial to put forward some very serious allegations against Mr Pullen, which the judge ultimately accepted and adopted in his Liability Judgment.  Further, at the highest, the case put forward in the pleadings and witness statement of the Plaintiff was awareness by the Bank as to the overcharge.  The Plaintiff had never gone beyond asserting undue influence and economic duress in the original round of pleadings.  There was no suggestion whatsoever in the pleadings or the witness statement that the Plaintiff asserted Mr Pullen to be the driving force behind a deception perpetuated against Esquire.  Knowledge about an error in the account and continually exerting pressure despite such knowledge is one thing.  Acting dishonestly with a fraudulent intent to deceive is quite another.  As observed by Lord Millett, if the real case of a party is fraud and dishonesty, he should plead it unequivocably.  A case of fraud should never be allowed to be slipped in by some pleas of less serious nature.

61.  The cross-examination on Day 18 does not assist the Plaintiff in this regard.  It took place after the close of the Plaintiff’s case.  The allegations of dishonesty were put to another officer of the Bank and the Plaintiff did not make any application to amend the Statement of Claim based on such cross-examination.  Nor did it give any warning that a case of fraud and dishonesty was being considered.  In any event, by then it was probably too late to expect the Defendant to call evidence from Mr Pullen for the purpose of the Trial on Liability.

62.  Had Mr Pullen been told about these serious accusations against him from an early stage of the action, it is most likely that he would come to testify in the witness box and no-one can speculate whether Waung J would reach the same conclusion.

63.  I cannot help from observing that the allegations of fraud and dishonesty and those of exemplary damages were so intertwined with the evidence on liability that had been adduced before and assessed by Waung J that had His Lordship been told of the Plaintiff’s intention to advance these new cases, it is most unlikely that a split trial would be ordered.  The Defendant would probably oppose to such a course.

64.  The Defendant had applied for leave to amend its Defence in January 2004 to put forward new matters justifying the $30 million.  Leave was refused by Waung J.  However, if the Plaintiff had applied to advance a new case of fraud and dishonesty basing on the $30 million overcharge at the same time, it is difficult to see how the learned judge could properly allow the Plaintiff’s amendment without granting leave to the Defendant.  It is equally difficult for me to see how the Plaintiff could end up in a better position when the allegations of fraud and dishonesty were added at an even later stage after they had secured some advantages in the findings contained in the Liability Judgment.

65.  I also bear in mind that the sale in question took place in April 1987.  The action was commenced in 1994.  It took the Plaintiff almost 20 years to plead fraud and dishonesty for the first time notwithstanding having its claim considered by several teams of experienced counsel and solicitors with several versions of the Statement of Claim being put forward.  Most of the Bank’s witnesses had retired and the lapse of memories of these people is certainly a prejudice that I should take into account. 

66.  The Plaintiff did not proffer any explanation why these new matters were not pleaded in the original round of pleadings.  It is quite plain to me that to allow these new matters to be canvassed at Stage II in these circumstances would inevitably bring about serious litigation prejudice to the Defendants that goes way beyond any implications for costs.  The prejudice would be so great that I would say the Defendants could legitimately complain that it could not have a fair trial of the issues of fraud and dishonesty and exemplary damages.  In my judgment, it is sheer forensic opportunism that the Plaintiff is trying to engage in.  Given the disadvantage and injustice that such conduct would occasion to the Defendants, the court should regard these new cases as vexatious and prejudice the fair trial of the action or otherwise an abuse of its process.  They were therefore struck out accordingly and leave would not be granted for the same to be put into the Statement of Claim by amendments.

Lack of reasonable argument for rescission or pecuniary rescission or custodial fiduciary

67.  Turning to the claims formulated as rescission and pecuniary rescission, I do not find the same sort of litigation prejudice vis-à-vis these claims as in the case of fraud, dishonesty and exemplary damages.  The striking out application is primarily based on the lack of reasonable arguability.  The main contention of Mr Jarvis built on the premise that by reason of the striking out of the claim against BML, rescission and damages in lieu of rescission (or pecuniary rescission) are not open to the Plaintiff and the most that the Plaintiff could claim for is equitable compensation. 

68.  I bear in mind that in an application of this nature, the court should only strike out a pleadings in a plain and obvious case.  As stated in Paragraph 18/19/4 of Hong Kong Civil Procedure 2006, the claim must be obviously unsustainable, the pleadings unarguably bad and it must be impossible, not just improbable, for the claim to succeed before the court will strike it out.

69.  Although the summons to strike out refers to a number of paragraphs, the crucial points revolve around the legal viability of the propositions in Paragraphs 3 and 4 of the Statement of Relief and Damages.

70.  Paragraph 3 is as follows,

“

Where one person (A) enters into a transaction by reason of the breach of fiduciary duty, economic duress and/or undue influence of another person (B), A is entitled as against B to rescission of the transaction and accordingly to require B to restore to him in specie any asset which was disposed of by A pursuant to the transaction of, if that is not possible, to require B to restore to him the value of the lost asset.”

Two cases were cited for this proposition: McKenzie v McDonald [1927] VLR 134; Mahoney v Purnell [1996] 3 All ER 61.

71.  On its face, this proposition merely sets out the legal analysis for rescission or, if that is not possible, damages in lieu of rescission.  I am happy to regard this as arguable insofar as A and B were parties to the impugned transaction.

72.  The problem in the present case is that the Plaintiff wishes to extend the principle to the scenario where it could not set aside the transaction against the other party to the sale (viz. BML).  Notwithstanding that, it claims it is still entitled to require the wrongdoer, viz. the Bank, to restore to it the value of the lost asset.  In his very helpful Written Submissions of 9 June 2006, Mr McGhee put the point succinctly in Paragraph 5.  Counsel supported his argument by two Australian cases: Ballantyne v Raphael (1889) 15 VLR 538; Curwen v Yan Yean Land Co Ltd (1891) 17 VLR 745.  Counsel very properly told this court that there is an Irish authority against him: Northern Bank Finance Corp Ltd v Charlton [1979] IR 149.  If the extension cannot be sustained, Paragraph 3 is not relevant to the Plaintiff’s claim herein. 

73.  As none of the cases cited are binding on me, I propose to consider the matter on principle first before I come to the cases.  Snell’s Equity  31^st Edn. defined rescission as follows,

“	Rescission is the non-consensual un-picking of a transaction: the setting-aside of the agreement and restoration of the parties (more of less) to the position they would have been in had the transaction never been made.”

74.  The Plaintiff’s argument on rescission seems to focus on rescission of the sale of the Property to BML.  The Bank was not a party to that transaction.  There cannot be any restoration of the position of the parties to that transaction.  The Plaintiff would not get the Property back from BML nor could it pay the purchase price back to BML.

75.  There was another transaction to which the Bank and Esquire were immediate parties.  That was the Esquire Agreement dated 26 April 1987.  Under that agreement, Esquire appointed the 2^nd Defendant as agent to sell the Property.  It was agreed that the net sale proceeds shall be applied towards the satisfaction of the property portion of the debt due from Esquire to the Bank.  Conditional upon receipt of that net proceeds, the Bank agreed to waive and release some of the debts due.  The Plaintiff had the benefit under that agreement in terms of the reduction of its indebtedness towards the Bank by the waiver and the net proceeds.  There are other provisions under the agreement that were implemented (restructuring of loans, extension of facilities etc.).  The Plaintiff did not seek rescission in respect of this agreement.

76.  By the plea in Paragraph 3 of the Statement of Relief and Damages, the Plaintiff wishes to seek monetary redress from the Bank by reference to the value of the lost asset.  In so saying, I have not overlooked Mr McGhee’s submission that the Bank might well be able to procure the re-transfer of the Property back from BML to the Plaintiff.  With respect, given the evidence leading to the striking out of the claim against BML, any suggestion that the Bank has any power to procure the same is simply unreal and fanciful.

77.  If it is a true restoration of the parties to the position they would have been in had the transaction never been made, and in order to be equitable, one would have expected the Esquire Agreement be rescinded as well.  I simply cannot see how it can be arguable that equity would grant relief to the Plaintiff without any regard to the benefit obtained by Esquire under the Esquire Agreement.  In substance, the sale of the Property was the implementation of one aspect of the Esquire Agreement. 

78.  Analysing the position from another angle, even assuming that for the purpose of this plea it is legally viable to treat the sale in isolation from the other aspects of the Esquire Agreement, there could not be any restoration of the position of the parties unless the Plaintiff (as successor of Esquire) shall pay back the sale proceeds to BML.  There must be mutuality in rescission.  This is the rationale for the requirement of restitutio in integrum.  But Esquire had already utilized the sale proceeds to reduce its indebtedness towards the Bank and it has since been wound up.  Restitutio in integrum is impossible.

79.  Subject to one rider, I agree with the helpful analysis of three different scenarios in Paragraph 8 of Mr Jarvis’ submission in reply to Mr McGhee’s supplementary submissions.

“	(1)	If A sells a property to B and equitable fraud has been committed by B inducing the sale, then prima facie, A is entitled to have the transaction set aside and rescinded.
	(2)	If A sells a property to B and equitable fraud has been committed by B inducing the sale, but B has transferred the property to C, an innocent purchaser for value, then A can no longer have the transaction set aside and rescinded because it is impossible to restore the parties to their original status.  In those circumstances, A can recover from B equitable compensation in lieu of rescission, being a term conveniently labeled ‘pecuniary rescission’.
	(3)	If A sells a property to C, an innocent purchaser for value, induced by the equitable fraud of B, then A can never have any remedy against C, but it may have a remedy in equity for reparative compensation against B, or if a common law tort has been committed, common law damages.”

80.  Counsel is correct to emphasize that we are dealing with scenario (3).  I am of the view that it is conceptually confusing and unhelpful to introduce the remedy of rescission as an available option to A against B in that scenario.  There is no un-picking of the transaction and the positions of the immediate parties to the transaction thereunder remain intact.  A has no remedy against C.  All that A wishes to seek is redress from a wrongdoer who is not a party to the transaction.  In my judgment, the proper remedies available to A in such circumstances should either sound in equitable compensation or common law damages.  One can no more seek rescission against a party not to the contract than one seeks specific performance of a contract against a non-party.

81.  The only rider I wish to add is that as far as the measure of equitable compensation is concerned, I will leave it open for argument at this stage whether such compensation should be confined to reparative compensation as opposed to substitutive compensation.  There could be further debate about the correct approach in quantifying and awarding equitable compensation at Stage II of the Trial (see Paragraph 7 of the Statement of Relief and Damages).

82.  In principle, I do not regard rescission or pecuniary rescission as an available option to the Plaintiff in its claims against the Defendants in the instant case.

83.  My analysis is supported by the judgment of Henchy J in Northern Bank Finance v Charlton [1979] IR 149 at p. 196-197.  The learned judge said,

“

When an agent-adviser … induces a client or customer, by means of a fraudulent misrepresentation, to purchase property from a third party, and when the purchaser, having completed the purchase and acquired ownership of the property, discovers the fraud, then I understand the law to be that the remedy of the purchaser lies in damages and not in rescission.  The reason is that, in such circumstances, as between the agent-adviser and the purchaser there is no form of rescission and restitution which could restore, even substantially, the status quo ante --- being the respective positions of the parties before the fraudulent misrepresentation was act acted on to the purchaser’s detriment.  An order such as was made in this case … so far from restoring the status quo ante results in a situation which never before existed.  In this case the return of the purchase money might be said to restore the purchasers’ former position, but the compulsory subrogation whereby the misrepresentor would be required to step into the purchaser’s shoes and take over the ownership of the property bought, which the misrepresentor had never owned, would have the effect of thrusting on the misrepresentor a wholly new factual and legal situation which would be incompatible with the mutuality and fairness inherent in the concept of restoring the status quo ante.”

84.  As regards the Australian cases, in my view it would be preferable to read Ballantyne v Raphael  (1889) 15 VLR 538 as the approach the court adopted on the particular facts of the case in awarding equitable compensation.  Hodges J clearly said that rescission of the contract could not be given.  The learned judge then considered what were the available options in achieving practical justice between the parties, see p. 555-6,

“

It seems to me only another way of assessing the damages, and a more certain and sure way.  It is putting the parties in precisely the same position, and yet not affecting anybody by reason of the damages being estimated too high or too low, or affecting them in a different way to what it would if they were the only two persons to the contract.”

85.  In Curwen v Yan Yean Land Co Ltd (1891) 17 VLR 745, Higinbotham CJ endorsed the approach in Ballantyne and regarded it as rescission in substance.  The resultant position was said by the Chief Justice to be the following,

“

But while the contract, so far as the company is concerned, remains, the same contract, so far as the person deceived is concerned, is rescinded, the wrongdoer being compelled to accept the shareholders’ obligations to the company, and being permitted, if he pleases, to become the holder of the shares in the substitution for the original holder.”

86.  With great respect, such a result would be wholly repugnant to the requirements of restitutio in integrum and mutuality in granting rescission.  The unraveling of the contract for one party but not the other is not a restoration of the parties to their respective positions prior to the contract.  It is a rewriting of the contract.  The other contracting party (vis-à-vis whom the contract is not rescinded) is forced to have a contract with a new party (namely the wrongdoer who is ordered to take up the obligation of the plaintiff) with whom he had not entered into an agreement.  This is not rescission.  Whilst I have no doubt on the facts of that case the remedy granted did achieve practical justice, I cannot agree with the legal analysis.  

87.  Paragraph 4 of the Statement of Relief and Damages pleads,

“

Further or alternatively, where a fiduciary, in breach of his fiduciary duty to his principal, has procured the transfer of one of the principal’s assets to a third party, the principal is entitled to require the fiduciary to restore to him the asset in specie or, if that is not possible to restore to him the value of the lost asset.”

88.  I accept Mr McGhee’s submission that this paragraph does not depend upon the concept of rescission or pecuniary rescission.  The proposition, as explained by Mr McGhee, stems from the duty of a trustee to restore to the trust estate the misapplied asset or a sum equivalent to the value of the lost asset (see Re Dawson [1966] 2 NSWR 211).

89.  The Plaintiff argued for the extension of that principle to all fiduciaries who have control over assets and procure the disposal of such assets in breach of their fiduciary duties whether or not title to those assets is formally vested in them (see Paragraph 14 of the Supplementary Submissions of 9 June 2006).  Mr McGhee described this category of fiduciaries as “custodial fiduciaries” and cited an interesting article by Professor Rickett at (2003) 25 Sydney L Rev 31 to support his contention.

90.  Mr Jarvis reminded this court of what had been said in 1911 by Fletcher Moulton LJ in Re Coomber [1911] 1 Ch 723 at 728-9,

“

Thereupon in some minds there arises the idea that if there is any fiduciary relation whatever, any of these types of interference is warranted by it.  They conclude that every kind of fiduciary relation justifies every kind of interference.  Of course, that is absurd.  The nature of the fiduciary relation must be such that it justifies the interference.  There is no class of case in which one ought more carefully to bear in mind the facts of the case, when one reads the judgment of the Court on those facts, than cases which relate to fiduciary and confidential relations and the action of the Court with regard to them.”

91.  The same point was made by Professor Rickett throughout his article cited by Mr McGhee. 

“

Equity will grant compensation where a breach of equitable duty by the owner of the duty has resulted in loss to the person owed the duty.  But a full appreciation of how equity compensates requires a quite sophisticated analysis.  The type and content of the duty allegedly breached must be very carefully articulated (such analysis to include considerations of policy and legal doctrine) so that [questions of causation, consequential loss, heads of damages and apportionment and mitigation can be properly considered].” (p.34)

“

Identification of the differences between various types of equitable obligations … is essential from a remedial perspective.  Once the nature of any particular equitable obligation that has been breached is identified, it becomes much easier to develop equitable compensation in a manner which properly reflects that loss suffered by the plaintiff which, consistent with the nature of the obligation, ought to be compensated.” (p.49)

See also the conclusions at p. 56-7.

92.  Mr Jarvis submitted that it was a fundamental misconception to equate the Bank’s breach of fiduciary duty as found by Waung J in the Liability Judgment with a breach of a custodial duty.  There are two limbs to this argument,

(a)

The Bank’s fiduciary position originated from the Power of Attorney which expressly directed the Bank to sell the Property.  Hence the sale of the Property was expressly authorized and the Bank had performed its primary obligation under the Power of Attorney.  In such circumstances, it would not be correct to grant remedies on the basis that there should not have been any sale of the Property and the Bank, even if it was held to be a fiduciary under the Power of Attorney, should not be ordered to restore the Property to the Plaintiff;

(b)

The Bank was only an agent for sale of the Property and did not hold or receive monies for Esquire in that capacity.  The sale agreement with BML and the assignment were executed by Esquire, not by the Bank under the Power of Attorney.  Therefore, there was no basis for requiring any account to be taken as between Esquire and the Bank by reason of the latter’s management of its property.  Hence, there is no question of the Bank ever been acting as a custodial fiduciary for Esquire.

93.  In his article, Professor Rickett described the characteristics of custodial fiduciaries and their duties at p.35-6,

“

All custodial fiduciaries, of which the express trustee is the paradigm example, are bound to apply the property they receive in that capacity for the benefit of another, and are thus under a fiduciary duty to account for the trust fund, which duty arises immediately upon receipt of the relevant property.  This is a primary obligation.  It is enforceable in itself as a primary obligation by those who are interested in the trust fund whether or not there has been any breach of that obligation by the fiduciary.  Its enforcement does not depend upon any breach, because a secondary obligation is not necessary.  The duty to render an accounting does not depend on the fiduciary having mishandled the property or having otherwise breached his or her trust.  The enforcement is directed at the administration of the trust.” (My emphasis)

Re Dawson was explained in that light, see p.37-8.  

94.  Putting aside cases where an agent is required to account to its principal secret profit obtained by him from the agency or opportunity arising therefrom (which does not arise in the instant case), I cannot see how an agent could have owed his principal a duty to account for property that the agent has never received into his hand.  As pinpointed by Professor Rickett, the receipt of the property by the fiduciary is essential to liability in terms of custodial fiduciary duty.

95.  It has to be remembered that the breach of fiduciary duties as found by Waung J proceeded on the basis that the Power of Attorney is valid.  Unless the Power of Attorney is affirmed, there is simply no basis for holding that the Bank owed any fiduciary obligation towards Esquire.  Hence, on proper analysis, the Plaintiff could not obtain relief both under the claims for breach of fiduciary duties and the claims for setting aside the Power of Attorney under economic duress and/or undue influence.  An election has to be made at some stage.  In considering whether Re Dawson is applicable in the context of the cause of action for breach of fiduciary duties, one should not have regard to the allegations relating to economic duress and/or undue influence.

96.  The breach of fiduciary duties established in the Liability Judgment stemmed from the preference of the interests of BML over that of Esquire and the inadequate exposure of the Property to the market.  None of these could lead to the setting aside of the Power of Attorney or the Esquire Agreement.  For reasons explained above, given that the sale to BML cannot be rescinded, the only remedies available to Esquire against the Bank are those sound in damages or equitable compensation.

97.  The title of the Property had never been passed to the Bank.  The sale proceeds were paid to the Bank pursuant to the Esquire Agreement for reduction of the Esquire indebtedness.  The Bank had never received any property of Esquire in its capacity as agent under the Power of Attorney.

98.  In such circumstances, there is no proper basis for applying the principle in Re Dawson as this is plainly not a case of custodial fiduciary relationship.

99.  I agree with Mr Jarvis that Paragraph 4 of the Statement of Relief and Damages cannot be justified by an application of Re Dawson by analogy.  Since this is the only basis advanced by the Plaintiff to sustain that paragraph, it follows from my conclusions that the paragraph ought to be struck out.

Results

100.  The Defendants succeed in the striking out applications.  However, the precise extent of the pleadings to be struck out should be precisely identified in the order.  I direct the parties to attempt to agree on that by reference to these Reasons for Decision and submit an agreed draft order for approval.  If no agreement is reached within 14 days, this court shall list the matter for argument.

101.  I also make an order nisi that the Plaintiff shall pay the Defendants’ costs of the application in any event.