LAM KI MING AND ANOTHER v. WONG CHI NANG AND ANOTHER

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 2690 OF 1996

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JUDGMENT

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The Plaintiff's case

          The Plaintiffs and the Defendants are, respectively couples who came to know each other in 1993 through the introduction of a mutual friend ("Mr Cheng"). According to the Statement of Claim, in or about June 1993, the Defendants "represented" to the Plaintiffs that they "had invested" in a property development project in Huizhou, Quangdong, China which the Plaintiffs later learned to be "Kam Mak Garden" ("the project"). On or about 17 June 1993, the Plaintiffs gave a cheque for $2 million to the Defendants for "investment" in property development in China. Subsequently, according to the Statement of Claim, the Defendants failed or refused to account to the Plaintiffs for the $2 million. After repeated requests and demands, allegedly the Defendants "refunded" $500,000.00 to the Plaintiff leaving the balance of $1.5 million unaccounted for. The Plaintiffs therefore claim for $1.5 million together with interest and costs.

2. In evidence, both Plaintiffs told the story as outlined in the Statement of Claim. The Plaintiffs say that they were and still are in the business of making gold ornaments. In 1993, they had a small factory in China. They came to know the 2nd Defendant first because the 2nd Defendant, through the introduction of Mr Cheng, placed an order with their factory for 300 taels of gold ornaments. The Plaintiffs in due course delivered the goods. The 2nd Defendant was supposed to pay by handing over to the Plaintiffs 300 taels of gold bars. But the 2nd Defendant at first only handed over 150 taels of gold bars. It took the Plaintiffs considerable trouble and time before they could get the 2nd Defendant to hand over the remaining 150 taels of gold bars. When the Plaintiffs finally got the remaining 150 taels of gold bars, they had lost confidence in the Defendants. The $2 million investment was made shortly after this gold ornaments transaction but before the remaining 150 taels of gold bars were handed over. The 2nd Defendant represented to the Plaintiffs that investment into property development in China would bring profits of "hundreds of thousands of dollars in one year's time." Relying on such representation, the Plaintiffs gave the Defendants the $2 million cheque, telling them it was pretty much all their (the Plaintiffs') assets.

3. Both Plaintiffs are adamant that before and at the time of their investing the $2 million, the Defendants had not given them any particulars about the project. No information and no documents were given to them. It was after some months, and at the earnest request of the Plaintiffs, that the Defendants issued a kind of "receipt" for the $2 million for the purpose of "investment in property development in Huizhou". Even on that receipt, the name of the project is not stated. About one year after the investment was made, upon the Plaintiffs pressing for information, allegedly the Defendants gave excuses that the property development project had stalled. The Defendants therefore asked for refund and indeed $400,000.00 and $100,000.00 were deposited by the Defendants into the 1st Plaintiff's bank account within the space of a few days in mid 1994. However, the Defendants have so far refused to refund the balance $1.5 million.

4. The Plaintiffs give another reason for the demand for refund. They say that at the time they invested the $2 million, their gold ornaments factory was closed by the Public Security Authority. The Plaintiff sold their gold stock to get the $2 million. A few months later, the closure order was lifted and the factory could resume business. Hence the Plaintiff needed money to buy gold for stock.

The Defendants' case

5. Both Defendants gave evidence. They admit having taken a $2 million cheque from the Plaintiffs. The cheque was paid into the bank account of a company called Kai Yeung Development Limited ("Kai Yeung"). It is common ground that the Defendants were and still are the only shareholders and directors of Kai Yeung. According to the Defendants, Kai Yeung was the vehicle through which the Defendants participated in property development in China. There is little doubt that, at least in 1992-1993, Kai Yeung was involved in some business in a big way. I see from the statements issued by the bankers of Kai Yeung that Kai Yeung at that time had consistently very large payments in and out. At times, Kai Yeung had tens of millions of dollars, even over one hundred million dollars, standing to the credit of Kai Yeung. It should also be pointed out that these statements were not disclosed to the Plaintiffs until the discovery stage of these proceedings. The 2nd Defendant admits that she told the 2nd Plaintiff that investing in property development in China would bring lucrative returns. It was, allegedly, because of such information that the Plaintiffs begged the 2nd Defendant to accept their investment into the project Kai Yeung was involved in. Further according to the 2nd Defendant, she told the Plaintiffs explicitly that Kai Yeung had a 20% stake in the project, that Kai Yeung's share of investment, amounting to $14 million, had already been injected into China. The project is evidenced by a triparte agreement ("The Triparte Agreement") between Kai Yeung, the Huizhou Branch Office of a Chinese bank and another Mainland party. The Plaintiffs were shown the Triparte Agreement at the time they made the investment. Obviously, there was no way the Defendant could join in as a fourth party to the Triparte Agreement. Therefore, the 2nd Defendant allegedly told the Plaintiffs that their $2 million would be accepted as taking over one-seventh part of Kai Yeung's interest in the project. It was allegedly made clear to the Plaintiffs that their $2 million piggy-backed investment would not give them any say in the management of the project.

6. Both Defendants deny that there was any gold ornaments transaction with the Plaintiffs. In fact, according to the 2nd Defendant, Mr Cheng had always been her supplier for gold ornaments.

7. The Defendants produced voluminous documents, including the Triparte Agreement, showing various aspects, stages and the fate of the project. According to these documents, the project has stalled because the bank partner was prevented by central government policy from participation in property development. With major source of funding cut off, construction work stopped after the foundation stage. Even though Kai Yeung and the other partner injected a little more capital, the project could not be revived. At present, apparently, the site is lying in waste under guard. The Defendants say that when the Plaintiffs enquired about the project in 1994, they were told and shown documents about the problems with the project.

8. In relation to the $500,000.00 payment, the 2nd Defendant says in evidence that she was told by the 2nd Plaintiff that the Plaintiffs' son had a kidney illness. At one stage, the son was treated at the military hospital in Quangzhou and the 2nd Defendant went with the 2nd Plaintiff to visit him. Thereafter, the 2nd Plaintiff told the 2nd Defendant that the Plaintiffs needed money for the son's treatment. The 2nd Defendant agreed to lend the money and was given the bank account number of the 1st Plaintiff. The 2nd Defendant deposited $400,000.00 into that account. A few days later, the 2nd Defendant was told by the 2nd Plaintiff that more money was needed. The 2nd Defendant was prepared to lend a further $100,000.00 only and she deposited that amount again into the 1st Plaintiff's account. Both amounts were allegedly understood by the parties to be loans repayable with interest at bank rate within 6 months.

9. In addition to the $500,000.00 which the Defendants counterclaim for repayment, the Defendants also counterclaim for RMB 1,142,857.00 being one-seventh of the extra capital Kai Yeung has injected into the project on top of the original $14 million under the Triparte Agreement.

10. There is an under-current that has emerged from the Defendants' evidence. It is the 2nd Defendant's evidence that she alone discussed with the Plaintiffs about investment into property development in China. The tenor of her evidence is that she was doing the Plaintiffs a favour in accepting their investment. The 1st Defendant, however, apparently was reluctant to have the Plaintiffs involved. His evidence suggests that although he knew the 2nd Defendant had been talking with the Plaintiffs about their investment, he did not know about the Plaintiffs' investment until after the $2 million cheque had been deposited into Kai Yeung's bank account.

11. In relation to Mr Cheng, it is common ground that he also placed $2 million in the hands of the Defendants in connection with property development in China. How that money changed hands is unclear. It is not even certain or determined what the nature of that $2 million is because Mr Cheng and the Defendants are opposing parties in another High Court action. It is also common ground that the Defendants have not "refunded" any amount to Mr Cheng.

The Facts

12. In so far as the factual issues between the Plaintiffs and the Defendants are concerned, there is hardly any independent witness or objective evidence in support of either. The case, therefore, primarily turns on credibility. In assessing credibility, the demeanour of the witnesses is a relevant and sometimes the only factor available to be taken into account. In the present case, it is difficult to say any of witnesses appears to be less credible than the others. I, therefore, proceed to analyse the respective case of the parties.

13. It may be said at once that the Plaintiffs' case as a whole is rather unconvincing. They, the Plaintiffs, are a middle-aged couple and had been in business for some years. They say the 2nd Defendant bragged about having made tens of millions of dollars of profits from property development in China. They say the Defendants invited them to invest. I asked the Plaintiffs, if the Defendants had made profits of tens of millions of dollars, did it occur to them to wonder why the Defendants had to invite them or needed them to put up a few million dollars? The point is not that the Plaintiffs should explain the motives of the Defendants for seeking the Plaintiffs as investment partners. The point is that the alleged invitation from the Defendants was inconsistent with the represented and real circumstances of the Defendants who clearly had no reason to have the Plaintiffs as investment partners. The bank account statements of Kai Yeung for the material time show that the Defendants had control of or access to funds of many millions of dollars. There was no practical or logical reason for the Defendants to involve the Plaintiffs in the Defendants' business. One must not forget that the Defendants did not show these bank account statements until the discovery stage of these proceedings. One is driven to the irresistible conclusion that, as the Defendants say, the Plaintiffs begged to join in.

14. The circumstances or conditions under which the Plaintiffs say they invested $2 million are bizarre. If the Plaintiffs are to be believed, they sold their stock in trade and placed pretty much all their liquid assets in the hands of the Defendants for a property development project but the Defendants, allegedly, did not even tell them the name of the project, the location (other than the city) of the project or other essential particulars about the project. As people who work with gold, who would gather every peckle of gold dust, were the Plaintiffs so simple and so naive as to entrust almost their entire working capital in the hands of the Defendants as investment into a project they knew practically nothing about? It should be pointed out too that the Plaintiffs say they gave the $2 million cheque without even putting the name of the payee on the cheque!

15. According to the Plaintiffs, a few months after they gave the Defendants the $2 million, they became anxious. The 2nd Plaintiff says she asked about progress of the project. But she dared not ask about the name of the project! She says that in conversations with the Defendants she had to refer to the project as "that side" or "that place". Belatedly, the Plaintiffs felt necessary to ask for a receipt for the $2 million. The Defendants gave a receipt which merely acknowledges receipt of $2 million as investment for property development in Huizhou. Again, the Plaintiffs say they dared not ask for more details to be put on the receipt.

16. The Plaintiffs say that eventually they lost confidence in the Defendants and demanded refund of their money. According to them, the Defendants at least tried to offer to convey properties in China to them as recompense. The Plaintiffs say they went with the Defendants to view the properties on offer. The Plaintiffs say earlier in their evidence that they knew nothing about the property market in China. They deny that they knew that the market in 1993 was very prosperous. They deny that they knew that the market had dropped in 1994 because of the macro-economic control policy. Yet they decided that the properties allegedly offered by the Defendants were not worth $2 million and rejected the alleged offers.

17. The Plaintiffs simply say that the Defendants agreed to refund and indeed paid back $500,000.00. Counsel for the Plaintiffs contends that I should not believe the 2nd Defendant about the payments being loans for medical treatment because the 2nd Defendant says the Plaintiffs' son had a kidney illness when in fact the Plaintiffs say their son had a disease affecting the pancreas. I think the "mistake" of the 2nd Defendant is understandable if the Plaintiffs deliberately misrepresented to the 2nd Defendant the seriousness of the child's illness in order to get loans. It is indisputable fact that $400,000.00 was first deposited into the 1st Plaintiff's bank account and then $100,000.00 deposited shortly thereafter. Quite clearly, the Defendants had $500,000.00 readily available. If it was a refund, why not pay $500,000.00 in one sum? If they were reluctant to repay, why pay at all? It seems to me that the Defendants' case that the monies were deposited as loans at the request of the Plaintiffs for medical expenses for the Plaintiffs' son is much more probable. Having got the first $400,000.00 as a loan, the 2nd Plaintiff quickly came back for more in order to sponge back as much of their outlay as possible.

18. The Defendants' case, on their evidence, appears to be closer to how people behave in the real world. There is no doubt that in the beginning the 2nd Defendant and the Plaintiffs were good friends. The 2nd Defendant indeed bragged about the profits her husband made in property development in China. This got the Plaintiffs drooling, especially when they were having difficulties with their gold ornaments factory. They begged to join in. The 1st Defendant was reluctant to involve the Plaintiffs. In any event, the Triparte Agreement for the project leaves no room for yet another party. The 2nd Defendant, whether on account of egoism or friendship, unilaterally took the cheque and deposited it into the Kai Yeung bank account. Thus the Plaintiffs' investment became, as it were, fait accompli. The 1st Defendant grudgingly acknowledged the Plaintiffs' interests. His reluctance is reflected in the somewhat half-hearted way he made out the receipt for the $2 million. Nonetheless, he must be taken to have accepted the Plaintiffs' investment into the project.

19. There is absolutely no reason why the 2nd Defendant did not show the Triparte Agreement or tell the Plaintiffs particulars about the project. To say the least, she had every reason to make clear to the Plaintiffs their share of interest for the purposes of calculating distribution of profits.

20. Although the Plaintiffs' case tries to paint the Defendants as swindlers, the Plaintiffs' own evidence, hard to believe though, in fact lends credibility to the Defendants. First, in the alleged gold ornaments transaction the Plaintiffs allowed the Defendants credit for 150 taels of gold bars. There was no document, no I.O.U., no proof at all. Yet, despite what the Plaintiffs say the difficulties they had in chasing for the 150 taels of gold bars, the Defendants, even on the Plaintiffs' own case, did deliver the 150 taels of gold bar. If the Defendants were swindlers, would the Plaintiff ever see the gold bars? If the Defendants were bent on cheating the Plaintiffs of their $2 million, would the Defendants offer properties as recompense or indeed repay at least $500,000.00 as the Plaintiffs' case alleges? I find that, as the Defendants say, the Plaintiffs manufactured the story about the gold ornaments transaction and sought to smear the credibility of the Defendants by this allegation of delay in delivering gold bars.

21. Counsel for the Plaintiffs attacked the credibility of the Defendants, pointing to a number of discrepancies between the evidence of the Defendants and between their oral testimony and their witness statements. I do not think it is really fruitful to deal with each of those discrepancies here. I have considered them very carefully. I think they are rather minor discrepancies. It would indeed be very surprising if there are no discrepancies. After all, the Defendants were recounting what happened six or seven years ago. Overall, the Defendants' case, unlike the patently absurd case of the Plaintiffs, do bear out homely truth.

22. I, therefore, find that the Plaintiffs were told by the 2nd Plaintiff about the project. They knew full well that by placing $2 million in the hands of the Defendants they the Plaintiffs acquired one-seventh share of the Kai Yeung interest in the project. I find also as a fact that the Plaintiffs knew full well they were liable to contribute pro rata more should Kai Yeung be required to inject more capital into the project.

23. I disbelieve the Plaintiffs' story about the gold ornaments transaction. I also disbelieve the Plaintiffs about the $500,000.00 being a repayment. I find as a fact that in mid 1994 the 2nd Defendant lent to both Plaintiffs a total sum of $500,000.00 at bank interest rate repayable after six months.

24. I also find that the Defendants did show in 1994 on demand by the Plaintiffs documents (1) relating to remittance of monies by Kai Yeung to China to fulfil its obligations under the Triparte Agreement, (2) relating to progress of the project and (3) problems leading to suspension of the project. Counsel for the Plaintiffs contends that these documents, copies of which are in the trial bundles and some originals produced in court by the 1st Defendant, cannot be admitted as evidence because they are not authentic. Counsel for the Plaintiffs says that all these documents have covering notarial certificates but none of the certificates has been produced.

25. First of all, I suggest counsel for the Plaintiffs confuses legal documents requiring authentication by notarial certificates with documents acceptable by the court as authentic documents. The Triparte Agreement, for instance, signed by the 1st Defendant himself for and on behalf of Kai Yeung can certainly be produced by the 1st Defendant as maker of the document without proof by notarial certificate.

26. Secondly, I suggest counsel for the Plaintiffs loses sight of the point that some of the documents relating to the project produced during the trial were also produced as proof of the documents shown to the Plaintiffs on demand in 1994. When it is the Plaintiffs' case that the Defendants failed to give account about the project, and the Defendants say they did show documents, then of course the Defendants ought to produce the documents they say they have shown. I am quite sure it was not the contemplation nor the expectation of the Plaintiffs that in 1994 the Defendants show notarized documents.

27. Lastly, in relation to a number of the project documents the makers of which are in China, the defence did serve hearsay notice. The Plaintiffs side has served counter-notice requiring proof of authenticity. But such counter notice is somewhat meaningless. Quite apart from the fact that some of the documents were produced as documents shown by the Defendants to the Plaintiffs in 1994, when the makers of documents are beyond the seas and not subject to the subpoena process of this jurisdiction, the objection raised by the counter-notice is not sustainable. The documents are admissible subject to the question of weight to be given by the court.

28. At the end of the day, there are ample reliable and relevant documents in support of the Defendants' case. There is the original Triparte Agreement. There are original receipts for nearly all the remittances by Kai Yeung pursuant to the Triparte Agreement and additional injection of capital. The Defendants having put in monies in excess of $20 million into project and shown photographs of the construction site in an uncompleted state, I may find that indeed the project is genuine and indeed the project has been stalled through no fault of the Defendants. The Plaintiffs may, of course, produce rebuttal evidence, e.g. to show that the project Kam Mak Garden has been completed. But there is no such rebuttal evidence. I, therefore, have no difficulty at all to find on the balance of probabilities the Defendants' case proven.

Liability

29. This is another ridiculous aspect of the Plaintiffs' case. The Plaintiffs are adamant throughout that the $2 million was their investment. The prayer in the Plaintiffs' Statement of Claim is for refund of the whole $2 million (less $500,000) and the Plaintiffs plead that they demanded refund in 1994. The Plaintiffs' own evidence is that they had decided in 1994 to withdraw from the investment because they were no longer interested in the project or in any property development in China. So the question boils down to whether the Plaintiffs were entitled to demand withdrawal of their investment. But it has not been made entirely clear what is the basis of this right to refund!

30. After some strenuously efforts on the part of counsel for the Defendants and queries by me, counsel for the Plaintiffs eventually states that the Plaintiffs' claim is not based on money had and received nor based on misrepresentation. So what right does the Plaintiffs have to demand withdrawal of investment money? I have studied the pleadings long and hard and I must say I am still not enlightened.

31. If it is contended that the Defendants agreed to refund the $2 million, that is not pleaded. In any event, I have found as a fact that the Defendants did not agree to refund. If it is suggested that the Defendants had a duty to give account, the Plaintiffs' pleadings do not say there was such an express duty. If it is suggested that there is an implied duty, that does not seem to be justified by the Plaintiffs' case. It is the Plaintiffs' case that they left a cheque, without specifying the payee, with the Defendants for investment into property development in China without bothering to extract from the Defendants the name of the project and other parties. They, the Plaintiffs, gave truly carte blanche to the Defendants. In any event, I have held that the Defendants did in 1994 on demand give account for the investment and according to such account, which I have found acceptable, the Plaintiffs' investment for practical purposes has gone down the drains through no default of the Defendants.

32. The Plaintiffs' evidence is that they had decided in 1994 to withdraw their investment because they were no longer interested in the project or any property development in China. So I do not see how it can help the Plaintiffs' case by the Plaintiffs' solicitors issuing a letter before action in 1996 demanding the Defendants to give account.

33. Is it the law that an investor is always entitled to withdraw his or her investment at will or on demand? As far as I am aware, there is no such thing as a species of contracts called investment contracts with established common law rights and obligations distinct from ordinary contracts. General principles and ordinary business sense apply to investment contracts. Ordinary business sense dictates that an investment cannot be withdrawn if it has already been lost. The Plaintiffs say that the Defendants "guarantee" tens of thousands of dollars of profits within one year for an investment of $2 million. But they are not suing for the guarantee. In any event, a guarantee has to be evidenced in writing. There is no such writing. Moreover, even the 1st Plaintiff says in evidence that he understood that there can be losses in investment. The evidence shows that the investment was already lost by the time the Plaintiffs asked for account which was given. So when the Plaintiffs later in the same year asked for refund they had nothing refundable!

34. Even if it may be said that in 1994 the $2 million was not yet irrevocably lost, counsel for the Defendants has the point covered. Counsel cited a large number of authorities on the meaning of "investment". I think it is only necessary to rely on the following: -

35. In the premises, I agree with counsel for the Defendants that, in the absence of any express term in an investment contract to the contrary, there would be an implied term that investment money cannot be withdrawable at will or on demand. I hold that this is especially so in the present case because the only matter of significance the Plaintiffs knew full well when they placed their money in the hands of the Defendants for investment is that the investment was to be in property development. It is really basic common sense that money applied into construction of properties cannot be withdrawn and the only reasonable expectation the Plaintiffs could and can have is distribution of profits after construction has completed and the properties sold. In the present case, the properties are neither completed nor sold.

36. Counsel for the Plaintiffs contends that there is no evidence that the $2 million from the Plaintiffs has been actually applied into project. Of course not. This is not what it was meant to be. I have found as a fact that the Plaintiffs were taking one-seventh of Kai Yeung's interests under the Triparte Agreement. Kai Yeung had already paid up its obligations for contribution of capital under the Triparte Agreement. The Plaintiffs' $2 million did not have to be actually injected into China.

Judgment

37. For all the reasons given, the Plaintiffs' claim must fail. Their claim is therefore dismissed.

38. I have found the evidence of the Defendants in relation to quantum under both counterclaims credible. The Plaintiffs are liable for the loans totaling $500,000.00 with interest thereon as agreed without further demand. The Defendants according to their own evidence did not press for the contribution of RMB 1,142,857.00 but they certainly demand such contribution by service of the counterclaim and upon such demand the Plaintiffs became liable to pay. As to interest on the RMB amount, there are clear authorities to the effect that the applicable rate of interest on a liquidated sum withheld from a successful party should be that for short term commercial investments. I am not so sure if the return rate for short term commercial investments can be readily ascertained in Hong Kong. To simplify matters, I think the Defendants would be content to have interest at the judgment rate.

39. Accordingly, there is judgment for the Defendants for :-