DYMOCKS FRANCHISE SYSTEMS (CHINA) LTD v. NORTON ROSE FULBRIGHT HONG KONG (A Partnership)

HCA 613/2015

[2019] HKCFI 1602

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 613 OF 2015

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J U D G M E N T

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A. Introduction

1.  By way of introduction, the essential background of this case is as follows: –

(1)  Hong Kong has a piece of home-grown legislation that may catch out the unwary.  It is the Transfer of Businesses (Protection of Creditors) Ordinance, Cap 49 (“TBPCO”), and it imposes liability for past debts upon anybody who takes over the business of another.

(2)  It is well established that a solicitor has a duty to advise his client of the risks to which he should be alerted, which the client may not appreciate.

(3)  In May 2012 an associate office of the defendant firm received an email with the subject “RE: Norton Rose – HK Commercial/Franchise Lawyer” from an established client which stated:

“We have a potential franchise dispute revolving around our intention to terminate a franchise and step-in to the store. Before we take final action, I would like to speak to a lawyer with experience in Hong Kong to confirm that our approach will not run into any unexpected problems”.

(4)  The client was then put in touch with Justin Davidson of the defendant.  In a situation that was obviously fluid, Mr Davidson did not warn that under Hong Kong legislation, the plaintiff could expose itself to liability if stepping-in to the store involved taking over the business of the defaulting franchisee.

(5)  The client had specifically asked to be warned of “unexpected problems”.  An obvious potential problem was not mentioned.

2.  The plaintiff’s case, in broad terms, is that in breach of the duty under the contractual retainer or in tort, the defendant has failed, whether in May 2012 or thereafter on 6 December 2012, to advise the plaintiff on the application and effect of the TBPCO in circumstances where (1) they held themselves out to be able to assist the plaintiff on commercial/franchise issues; (2) the franchisee was known to have questionable solvency; and (3) they ought to have known – or at the very least ought to have asked whether – there was a possible takeover of the bookshop business by the plaintiff from its franchisee. 

B.     Factual Summary

B1.    Dymocks

3.  The plaintiff is a Hong Kong company incorporated in 1997.  It is a wholly-owned subsidiary of New Trend International Limited, which at all material times was 55% owned by Dymocks Holdings Pty Limited (“Dymocks Holdings”, an Australian company) and 45% owned by SCMP Group Limited (“SCMP”). The daily operations of the plaintiff have been subject to the supervision and directions of the Dymocks group of companies (“Dymocks”) held under Dymocks Holdings.

4.  Dymocks granted franchises to various independent franchisees to operate bookstores under the “DYMOCKS” corporate brand, image and logo (“Dymocks Brand”).  The plaintiff was responsible for overseeing and supervising the granting of franchises in Hong Kong.

B2.    Relationship between the plaintiff and Info-Vantage

5.  In March 2000, the plaintiff granted a non-exclusive franchise to Info-Vantage Limited (“Info-Vantage”) to carry on the business of a bookstore in the IFC Mall under the Dymocks Brand.

6.  The physical premises of the bookstore at IFC mall will be referred to as the “Shop Premises” and the bookstore business operated by Info-Vantage at the Shop Premises will be referred to as the “Business” in this Judgment.  In this regard, it can be noted that in the emails/documents, Dymocks very often used the word “store” compendiously to denote both the Shop Premises and the Business, as was clear from the context of the relevant emails/documents.

7.  The plaintiff was the leaseholder of the Shop Premises and it sublet the Shop Premises to Info-Vantage for the purpose of the operation of the Business. 

8.  The last franchise arrangement between the plaintiff and Info-Vantage was entered into on 7 June 2010, and such arrangement was governed by a Franchise Agreement and a Deed of Charge of the same date.  The Franchise Agreement was governed by the law of New South Wales, Australia (Cl 22.15).  It contained provisions conferring rights on the plaintiff to (i) terminate the franchise arrangement if Info-Vantage breached the terms of the Franchise Agreement (Cl 14.4); and (ii) purchase the business assets of Info-Vantage on termination (Cl 15.6).

9.  At all material times, Info-Vantage was owned and/or controlled by an individual named Robert Chan.  Robert Chan was also the franchisee of the bookstores operated under the Dymocks Brand in the Repulse Bay and K-11 Mall.

B3.    Default by Info-Vantage

10.  From September 2011, Info-Vantage began to default in payment of franchise fees, advertising levy and rent.

11.  In early March 2012, the issue of Info-Vantage’s default was discussed among Jannie Tam (General Manager of the plaintiff), Steve Cox (director of the plaintiff) and Mark Buckland (General Counsel of Dymocks, a solicitor of New South Wales).  It can be seen from the emails that:

(1)  Mr Buckland was unaware of the existence of the TBPCO – he “advised that creditor could not pursue Dymocks but Robert Chan personally even if [Dymocks] take over the store”. 

(2)  Dymocks was exploring the option of repossessing the Shop Premises and taking over the Business (even if only as a temporary measure), as Jannie Tam was asking questions including “[h]ow long can we take on the store until a new FO is identified and approved by Dymocks and IFC landlord” and “[w]hether the existing team will stay on to operate the store”.

12.  On 20 March 2012, the plaintiff issued a breach notice to Info-Vantage signifying its intention to terminate the Franchise Agreement and asking it to remedy the breaches by 15 April 2012.

13.  On 5 May 2012, the plaintiff issued a termination notice to Info-Vantage giving notice to terminate the Franchise Agreement.  However, Info-Vantage was given a grace period of 30 days to try to sell the “store” as a going concern (which in the context clearly meant the Business); and in the event that Info-Vantage could not do so within the grace period, the plaintiff would proceed to take over the “store” on 6 June 2012.

B4.    Engaging the defendant for advice

14.  In the morning of 18 May 2012, there was a conference call between the representatives of the plaintiff and the representatives of SCMP, in which SCMP raised various concerns about the take-over procedure.  The concerns raised, as evidenced by a summary attached to the email of 18 May 2012 at 3:38pm, included: –

(1)  enforcement implications in relation to the taking over;

(2)  finance issues, such as how the plaintiff should ascertain the fair market value of the assets of the Business; and

(3)  human resources issues in relation to the transfer of employees from Info-Vantage to the plaintiff, and what should happen to the later employees if the plaintiff sold the Business to another franchisee.

15.  After SCMP raised concerns, on 18 May 2012, Mr Buckland emailed (at 5:40 pm) Fiona Wallwork of Norton Rose Australia.  Thesubject of the email was“RE: Norton Rose – HK Commercial/Franchise Lawyer”.  In context, the email bears repeating:

“We have a potential franchise dispute revolving around our intention to terminate a franchise and step-in to the store. Before we take final action, I would like to speak to a lawyer with experience in Hong Kong to confirm that our approach will not run into any unexpected problems.” (emphasis added)

16.  By an email dated 21 May 2012 at 8:56 am, Fiona Wallwork replied to Mr Buckland (copying in Mr Davidson, an intellectual property partner of the defendant) stating: –

“Justin Davidson, an IP partner in our corporate team located in Hong Kong, will be able to assist with the franchise/commercial issues.” (emphasis added)

17.  On the same day, Mr Buckland emailed Mr Davidson requesting to “discuss the situation” with him and “obtain some verbal advice to confirm [Dymock’s] strategy”.

18.  A telephone call (“22 May Call”) was arranged at 2 pm on 22 May 2012 between Mr Buckland, Mr Davidson and Benjamin Ridgeon (a Senior Associate of the defendant). 

19.  There is a factual dispute as to the contents of the 22 May Call.  Essentially: –

(1)  According to Mr Davidson of the defendant:

(a)  Dymocks did not want the defendant to conduct a broad review of issues relating to the termination of the franchise, and Mr Buckland wanted the defendant only to consider Dymocks’s lawful means for recovery of possession of the franchisee’s Shop Premises at the IFC Mall. 

(b)  Mr Buckland was unwilling to provide a copy of the Franchise Agreement, and told the defendant that it was unnecessary for the defendant to advise on it.  Mr Buckland said that Dymocks were experts in the field of franchising, and due to costs considerations, he did not want the defendant to spend any time looking at the Franchise Agreement or its issues.  Mr Buckland just wanted the defendant to advise on the means for recovery of possession of the Shop Premises.

(c)  Mr Buckland also told the defendant that Dymocks had encountered problems with the franchise in Repulse Bay, though in that case they had managed to arrange for a sale of the store.

(2)  Mr Ridgeon has given a similar account in his statement, but he does not suggest that Mr Buckland only or justwanted the defendant to consider the means for recovery of possession of the Shop Premises. 

(3)  On the other hand, Mr Buckland’s evidence is that:

(a)  He told the defendant about the Shop Premises at IFC sublet by the plaintiff to Info-Vantage which was in arrears of rent and franchisee fees, and that the defendant had served a notice of breach and a notice of termination on Info-Vantage.

(b)  He also told the defendant that the plaintiff’s normal practice was to try to persuade a failing franchisee to sell the franchise on to another franchisee and that was what the plaintiff had done with a failing franchisee in Repulse Bay.

(c)  While he did tell the defendant that the defendant did not need to review the Franchise Agreement to advise on whether the plaintiff had valid grounds to terminate the same, as they were familiar with the Franchise Agreement which was not governed by Hong Kong law, at no time did he ask or instruct the defendant to limit its advice to Hong Kong property law issues.

(d)  What he was looking for was guidance on any Hong Kong law issues that may arise from the termination of the franchise and exercise of the rights to step-in to the Business under the Franchise Agreement.

20.  An attendance note (“Attendance Note”) was prepared by Mr Ridgeon in respect of the 22 May Call. 

(1)  Mr Ridgeon’s evidence is that points (1), (2) and (3) in the Attendance Note were written by him as possible issues that might arise or be considered in the forthcoming call.  Notably, point (2) refers to “Restrictive covenants + employment law”. 

(2)  According to the Attendance Note, the following matters (amongst others) were discussed/mentioned during the 22 May Call:

(a)  “Normal practice – persuade to try to sell store – another Franchisee.  Didn’t try to sell business – Notice of Termination issued – 30 days”; and

(b)  “Lawyers letter repayment plan – arrears remain untouched – if accepted will not challenge step in.  Attracted to offer”.

21.  Following the 22 May Call, there were internal emails within the defendant which show that the defendant was considering the means of the plaintiff to gain possession of the Shop Premises.  Mr Davidson asked for the head-lease and sub-lease of the Shop Premises and the same were sent by Mr Buckland to Mr Davidson.

22.  In the email dated 25 May 2012 at 8:16 pm from Mr Davidson to Mr Buckland: –

(1)  The plaintiff gave advice on the methods of re-possession of the Shop Premises, which was described as “initial” by Mr Davidson.  The defendant advised that it would take at least 3-4 months to recover possession of the Shop Premises through court proceedings, with another 1-2 months to instruct the bailiff to vacate the premises; that it would be possible to resort to self-help to re-enter the Shop Premises, but that option would be fraught with danger.  The advice also mentioned the “commercial risk” of Dymocks in entering into a settlement with Info-Vantage. 

(2)  A copy of an engagement letter dated 24 May 2012 (“Engagement Letter”) together with the defendant’s standard terms was attached for Dymocks to counter-sign and return. In this regard:

(a)  Paragraph 1 of the Engagement Letter stated that the defendant had been instructed to:

“assist and advise in relation to dispute with Info-Vantage Ltd. in relation to the potential termination of a franchise in Hong Kong.” (emphasis added)

(b)  Cl 12 of the standard terms of the defendant contains an entire agreement clause (“Entire Agreement Clause”), stating that:

“These terms of engagement supersede any earlier agreement with you. Unless you and we agree otherwise these terms of engagement will constitute the entire agreement between us in relation to our engagement.”

23.  Meanwhile, Info-Vantage offered a new repayment schedule to the plaintiff on 18 May 2012 and this led to further without prejudice negotiations between the parties from late May to early July.

24.  On 6 June 2012, in response to a follow-up email from Mr Davidson on the same date about any further progress with Info-Vantage, Mr Buckland told the defendant that they were still in negotiation with the franchisee.

25.  By a letter dated 21 June 2012 (with heading “Advice on Potential Termination of a Franchise in Hong Kong”), the defendant sent an invoice (in US$) to Dymocks for the work done.  A revised invoice (revising the currency to HK$) was subsequently issued on 25 June 2012, and it was entitled “Advice on potential termination of a franchise in Hong Kong”.  The narrative of the work done is described as follows:

“Attend call with M Buckland regarding termination of franchise arrangement with Info-Vantage on 22 May 2012; consider vacating the premises issues; review 2006 letter of sub-lease and the Head lease; send advice to M Buckland on 25 May 2012; email to M Buckland follow up on progress; including all incidental care and attendances throughout.” (emphasis added)

26.  Thereafter, there was no communication between Dymocks and the defendant until 6 December 2012 (see below).  It is common ground that apart from the email on 25 May 2012, the defendant did not give any supplemental points of advice.

B5.    Further default by Info-Vantage

27.  On 5 July 2012, a Deed of Release was entered into, pursuant to which Info-Vantage was allowed to continue to occupy the Shop Premises and operate the Business, but needed to make payments to the plaintiff according to a payment plan.

28.  However, Info-Vantage continued to default on its financial obligations.  In late September 2012, the plaintiff began to explore options including (i) passing on the “store” to a new franchise owner; and (ii) taking it over as a company store. 

29.  On 4 October 2012, Jannie Tam had a meeting with SCMP during which the transition of staff from Info-Vantage to the plaintiff upon repossessing the Shop Premises and taking over the Business was discussed.

30.  On 8 October 2012, the plaintiff issued a breach notice to Info-Vantage signifying its intention to terminate the Franchise Agreement and asking it to remedy the breaches by 22 October 2012.  It was contemplated that Info-Vantage would be unable to rectify the breaches, and the plaintiff would take possession of the Shop Premises and take over the Business, and would continue its efforts to secure an alternative franchise owner to operate the store.

31.  On 9 October 2012, the representatives of Dymocks and SCMP had a conference call. According to the meeting notes prepared by Mr Buckland, there was a discussion in respect of the employment issues upon the taking over of the Shop Premises and the Business.

32.  By email of 16 October 2016, Mr Buckland asked Vera Leung of legal department of SCMP to recommend a law firm to give a second opinion on property law advice the plaintiff had received from the defendant, given that the plaintiff was not satisfied that they would have to spend 6 months in recovering the possession of the Shop Premises according to the defendant’s advice. The email also mentioned that Mr Buckland had “received advice from Deacons on the insolvency of Info Vantage Limited”.

33.  On the recommendation of SCMP, Mr Buckland contacted Messrs. Kao, Lee & Yip (“KLY”): –

(1)  On 16 October 2012 at 14:11, Mr Buckland emailed Amy Li of KLY, the subject of the email being “Property Dispute”, saying that they would like “advice regarding the rights and obligations of the parties in the event that the breach notice is not complied with”.

(2)  On 17 October 2012, there was a telephone conversation between Mr Buckland and Emmanuel Kao of KLY.  The meeting notes prepared by Mr Buckland stated: –

“I gave Emmanuel a brief on the situation and advised that we wanted advice on what our rights and options are to take back the site.

Emmanuel indicated that the Norton Rose advice that the site could be taken back in 6 months was probably optimistic – it may take 9 months for an order for possession.” (emphasis added)

(3)  By email dated 18 October 2012 at 7:03 pm to Mr Buckland, Matthew Yim of KLY requested a copy of the Franchise Agreement. By email of the same date at 7:34 pm to Matthew Yim and Emmanuel Kao, Mr Buckland stated: –

“On the basis that the Franchise Agreement is required for some issue associated with the property law question, I attach the Franchise Agreement (in 3 parts in this plus two additional emails).

Obviously we do not need advice on the Franchise Agreement, its breach or enforcement separate to the property law/lease issues.” (emphasis added)

34.  On 25 October 2012, KLY provided a written advice (“KLY Advice”) to Dymocks in relation to the “recovery of possession” of the Shop Premises.  The KLY Advice recommended a “self-help” re-entry.

B6.    Taking over the Shop Premises and the Business

35.  By an email dated 30 November 2012 at 12:01 pm, Mr Buckland emailed Emmanuel Kao of KLY and asked for it to be arranged that a lawyer could be on site when the plaintiff took possession of the Shop Premises on 6 December 2012 after the termination of the Franchise Agreement on 5 December 2012 for the purpose of (i) addressing any employee concerns; (ii) addressing Robert Chan, the owner of Info-Vantage, when he attends the site; and (iii) addressing any police that may be called to explain the situation. Emmanuel Kao thereafter recommended Matthew Yim who had been following the case.

36.  On 3 December 2012, a Notice of Termination was served by the plaintiff on Info-Vantage specifying termination of the franchise at 11:59 pm on 5 December 2012.  The plaintiff also issued a letter to the suppliers of Info-Vantage informing them of the upcoming takeover of Shop Premises and the Business.  It is obvious from the said letter that the plaintiff thought that in taking over the Business and the Shop Premises, it would not assume responsibility for the debts of Info-Vantage.

37.  On 6 December 2012 at 4:40 am, the plaintiff sent a Notice of Asset Purchase dated 5 December 2012 to Info-Vantage, exercising its option under Cl 15.6 of the Franchise Agreement to purchase the tangible assets used by Info-Vantage in the Business. 

38.  Later on the same day, the plaintiff entered into possession of the Shop Premises by way of self-help: –

(1)  After the lock was changed in the early morning with the approval of the landlord, the plaintiff immediately carried out a stock-take in the Shop Premises.  The intention of this was to pay the original suppliers for any stock (which was supplied by the original suppliers to Info-Vantage subject to retention of title clauses) which remained unsold.

(2)  At around 8:40 am in the morning, while the plaintiff was carrying out the stock-take in the Shop Premises, Robert Chan appeared.  He was agitated about the situation and called the police.  Stephen Cox, who was then at the scene, arranged Matthew Yim of KLY to come to the Shop Premises to assist.  Later on, Mr Buckland also contacted Mr Davidson to come to the Shop Premises and explain the situation to the police. 

(3)  After Mr Davidson arrived, Stephen Cox and his colleague tried to bring Mr Davidson up to date and handed to him several documents, which included the KLY Advice and the Franchise Agreement.  The tension at the scene was eventually resolved and the police left.  The plaintiff then continued with the stock-take. 

(4)  Stephen Cox’s evidence is that “given that the plaintiff had already planned to carry on the Business in the Shop, I must have informed Mr Davidson of this plan when I brought him up to date with the matter on 6 December 2012, although I cannot now recall the actual words I used at that time.”  On the other hand, Mr Davidson alleged that he was not informed by the plaintiff that they planned to do anything other than take possession of the Shop Premises.

(5)  Mr Davidson was however aware that the plaintiff was making a record of what they found on the Shop Premises on that day, but he claimed that he thought at the time they were doing this for protective reasons in case the franchisee alleged theft.

(6)  Mr Davidson also offered to arrange a copy to be made of the hard drive on the franchisee’s laptop found on the Shop Premises, and took away the laptop to obtain a quote from a forensic investigator.

39.  Also on 6 December 2012, the plaintiff issued a further letter to the suppliers of Info-Vantage informing them of the successful takeover.  The said letter asked the suppliers to make claims of the outstanding debt with Info-Vantage to Robert Chan directly (again, the clearest indication that the plaintiff was unaware of the TBPCO and its effect).

40.  The plaintiff reopened the store for trading on 7 December 2012, re-employing the staff members who had been employed by Info-Vantage.  The plaintiff paid HK$54,768.20 to such employees of Info-Vantage as their salaries for the period from 1 to 5 December 2012.

41.  After recovery of the possession of the Shop Premises, the plaintiff obtained a valuation of the tangible assets used by Info-Vantage in the Business (valued at HK$430,000), and purchased the same by setting it off against the debts owed by Info-Vantage to the plaintiff.

42.  On 17 December 2012, the defendant issued an invoice to the plaintiff.  The invoice was entitled “Advice on potential termination of a franchise in Hong Kong”, and the narrative of the work done is described as follows: –

“Attend urgent call with M Buckland regarding termination of franchise agreement with Info-Vantage and self-help remedy on 6 December 2012; review file and advice including sub-lease and head lease; attend meetings with S Cox and Info-Vantage with HK police; negotiate criminal damage allegations and resolve HK police involvement; attend conference calls with M Buckland and S Cox; to include all incidental care and attendances throughout.”

B7.    Claims by suppliers of Info-Vantage

43.  On 21 December 2012, the plaintiff received a letter of demand from Yiu Ka Fung Vincent trading as Confidence Services Centre (“Confidence”) alleging that the plaintiff was responsible for the debts of Info-Vantage pursuant to section 3 of the TBPCO.

44.  At that time, Mr Buckland did not consider that the TBPCO was applicable, and he asked the defendant to write a letter to Confidence’s solicitors.

45.  Confidence subsequently issued proceedings against the plaintiff (HCA 1606/2013) (“Confidence Action”), and the defendant was engaged in defending those proceedings.  A barrister, Mr Douglas Clark (“Mr Clark”) was also engaged to advise the plaintiff.  He gave a written advice on 16 May 2013.  Mr Clark was of the view that there was a 50% chance that the plaintiff would be found to be a transferee of the Business under the TBPCO, and he recommended that the plaintiff should take advantage of section 8 of the TBPCO so as to limit its liabilities.

46.  On 12 July 2013, with the assistance of the defendant and Mr Clark, the plaintiff published a notice inviting creditors of the Business to notify the plaintiff of their names and addresses and details of amounts owed by Info-Vantage as at 6 December 2012. Thereafter, after ascertaining the amount of the total indebtedness of the Business at HK$12,054,015.66 and pursuant to Mr Clark’s advice, the plaintiff made payments in pro-rated amounts equal to HK$500,000 to all known creditors of the Business (“S.8 Payment”).  The S.8 Payment comprised: (a) HK$430,000 as the value of the assets of the Business; (b) HK$54,768.20 as the payments to the employees of Info-Vantage for salaries from 1 to 5 December 2012; and (c) HK$15,231.80 which rounded up the payment to HK$500,000.  In respect of Confidence, HK$52,884.69 being the pro-rated payment of the S.8 Payment was paid to it.

47.  In October 2013, Mr Buckland and Andrew Forsyth (Strategy and Business Director of Dymocks) had a telephone conversation with Mr Davidson and they made a complaint on behalf of the plaintiff about the defendant’s failure to advise the plaintiff on the existence and effect of the TBPCO.

48.  On 31 October 2013, the plaintiff made an application seeking leave to amend its defence filed in the Confidence Action (“Amendment Application”) by pleading an alternative defence pursuant to section 8 of the TBPCO (“S.8 Defence”).  The only defence relied upon by the plaintiff before the proposed amendments was that the plaintiff was not a transferee for the purpose of the TBPCO (“Non-Transferee Defence”).

49.  On 5 November 2013, Confidence applied to strike out the Non-Transferee Defence (“Striking Out Application”).

50.  On 29 November 2013, Mr Davidson sent a letter to the plaintiff denying its complaint.  After that, there was further correspondence between the plaintiff and the defendant between November 2013 and February 2014 where the parties repeated their position.

51.  By a Judgment dated 8 April 2014, DHCJ B Chu (as she then was) ruled that the Non-Transferee Defence and the S.8 Defence were incompatible and inconsistent, and ordered that the plaintiff make an election between the two defences.

52.  On 30 April 2014, the plaintiff lodged an appeal (“Appeal”) against the Judgment of DHCJ B Chu. On 14 May 2014, Confidence lodged a cross-appeal.

53.  In July 2014, the defendant was replaced by DLA Piper Hong Kong (“DLA”) to represent the plaintiff in the Confidence Action and the Appeal.

54.  By a Judgment dated 3 July 2015, the Court of Appeal ruled that the S.8 Defence and the Non-Transferee Defence were not incompatible, but the Non-Transferee Defence was unarguable and should be struck out.

55.  On 24 July 2015, the plaintiff took out an application seeking to set aside part of the Judgment of the Court of Appeal (“Setting Aside Application”) on the basis that Confidence had not pleaded any case based on detriment, one of the grounds relied upon by the Court of Appeal in reaching its decision.  The Setting Aside Application was dismissed by the Court of Appeal on 2 October 2015.

56.  By a written advice dated 27 October 2015, Mr Clark expressed his opinion that the remaining S.8 Defence might fail:  

“at the hurdle that there had been a preference to the staff of Info-Vantage in paying their unpaid salaries”; and “the success or failure of the defence will depend on whether the court accepts that under the terms of the Franchise Agreement the only value of the business that Dymocks needed to pay for was the assets of the business.”

57.  Following amendments to the pleadings by the respective parties, additional issues arose concerning the value of the Business, including an averment that the value of the Business did not take into account the cost of the fit-out (HK$3,262,755) that occurred 18 months before the taking over of the Business.  As a result, the plaintiff was advised that it was necessary to put forward expert evidence to support the S.8 Defence. 

58.  Given the additional costs and the advice on the merits of the S.8 Defence by Mr Clark, the plaintiff wanted to settle the matter with Confidence.  By a written advice dated 3 May 2016, Mr Clark opined that the chances of the plaintiff successfully defending the Confidence Action was 30%, having taken into account the new arguments raised by Confidence as to the value of the Business, and that a settlement up to an amount of HK$1,925,000 inclusive of interest and costs would be in the best interests of the plaintiff.

59.  The Confidence Action was settled on 4 August 2016 when the parties signed a settlement agreement, whereby the plaintiff paid HK$1,400,000 to Confidence in full and final settlement inclusive of interest and costs.

C.     Issues at Trial

60.  In light of the stance taken by the defendant in its opening, the plaintiff correctly submitted that the issues to be decided by the court can be stated as follows: –

(1)  What was the scope of the defendant’s retainer?  Did the scope of duty include advising on the potential application of the TBPCO and its implications?

(2)  Was the loss and damage suffered by the plaintiff caused by the defendant’s breach of duty in terms of factual causation and legal causation?

61.  It does not appear to be disputed by the defendant that if advising on the potential application of the TBPCO and its implications fell within the scope of retainer, the defendant would be in breach of its duty of care to be expected of a reasonably competent solicitor practising in the franchising/commercial field for having failed to do so whether in May 2012 or thereafter or on 6 December 2012.  Briefly stated: –

(1)  The solicitor should be judged by the standard of the reasonably competent solicitor specialising in whatever areas of law the defendant holds himself out as a specialist.  It is the solicitor’s duty to identify any matters which are or may be important to the client and to bring them to his notice, and to advise his client of the risks to which he is or should be alerted but which the client, as a layman, may not appreciate.  See Jackson & Powell on Professional Liability, 8^th ed, §§11-101, 11-167, 11-172.

(2)  Any reasonably competent franchise/commercial lawyer in Hong Kong should have been aware of the unique Hong Kong provisions in the TBPCO and how that statute operates in broad terms.  A takeover of a business from the franchisee ought automatically to lead to a consideration of the TBPCO as the client might unexpectedly become liable for the past debts of the franchisee.

(3)  The defendant should have advised the plaintiff on the risks and potential consequences of the operation of the TBPCO in May 2012 or soon thereafter.  It did not need to give a full verbal advice during the 22 May Call, but it should have raised the issue and explored it with Mr Buckland. Upon identifying the issue, follow-up work could then be done.

(4)  The breach was compounded by the defendant’s failure to provide the proper advice on 6 December 2012, when it was or should have been apparent to Mr Davidson, who was at the IFC store, that the plaintiff planned to take over the Business.  Stephen Cox must have updated Mr Davidson about the position including that the plaintiff was taking over the Business and was going to re-open the Shop Premises on the following day.  He was a businessman and not a lawyer.  Mr Davidson was also aware of the stock-take exercise of the plaintiff at the Shop Premises.

D.     Overview of the Evidence adduced at Trial

62.  There can be no dispute that a reasonably competent commercial/franchise solicitor qualified in Hong Kong ought to be aware of this unique legislation, and should have an understanding of how it operates.  He is not expected to know all the details.  But if he is called upon to advise in a context where a business is being taken over or transferred, he should recognise that the legislation could potentially be engaged.

63.  This is exactly what should have happened in the present case.

64.  In his email to Fiona Wallwork of Norton Rose Australia, the in-house lawyer of Dymocks in Australia, Mr Buckland, indicated that Dymocks might become involved in a franchise dispute in Hong Kong.  He stated that Dymocks intended to “terminate a franchise and step-in to the store”.  He wanted to speak to a Hong Kong lawyer with experience of such matters to ensure that Dymocks would not run into “unexpected problems”, before taking final action.

65.  Fiona Wallwork, who was experienced in such matters, and specialised in franchise law, plainly understood Mr Buckland’s likely requirements, and put him in touch with Mr Davidson, whom she represented “will be able to assist with the franchise/commercial issues”.

66.  It must be obvious from the context, that Mr Buckland was using the words “step-in to the store”, to convey that Dymocks intended to exercise its step-in rights under the franchise agreement.  In other words, it intended to take over the franchised business.

67.  It is important to appreciate that even before the start of the telephone conference on 22 May 2012, Mr Davidson was in possession of sufficient information to alert him to the possibility of a problem under local law.

68.  After being put in touch with Mr Davidson, Mr Buckland sent an email indicating that he wanted to discuss the situation with Mr Davidson, and obtain some “verbal” advice.  He was expressing a desire for oral, rather than written, advice.  A telephone conference was then arranged.  Mr Davidson did not tell Mr Buckland that it was unlikely that it would be possible to give him oral advice, or that it was not the practice of the firm to give oral advice during an introductory call, or indeed that the forthcoming telephone call would be treated as an “introductory call” (Dymocks was, after all, a long-established client of Norton Rose in Australia).

69.  Before the call started, Mr Davidson and his colleague, Mr Ridgeon (who specialised in dispute resolution but not commercial/franchise law) had a discussion and considered the issues that might arise in the forthcoming call.  The discussion was avowedly brief, and was clearly hampered by the fact that Mr Ridgeon was not shown either of Mr Buckland’s emails.  Mr Davidson was aware that franchise agreements generally confer step-in rights,and he understood the meaning of “step-in” in the context of franchising, and yet he did not alert Mr Ridgeon to the fact that it was Dymocks’ intention to take over the franchised business in Hong Kong or that Mr Buckland would be calling to seek verbal advice in relation to the proposed strategy to ensure that Dymocks would not run into “unexpected problems”, before taking final action.  This is important, because it appears that Mr Ridgeon did in fact have some experience of litigation involving the TBPCO, and had previously considered its terms.  If anybody was going to spot a potential problem in that regard, it was more likely to be Mr Ridgeon.

70.  The fact that there was to be a taking over of a business would be sufficient to alert a reasonably competent solicitor, particularly one held out to be a specialist in commercial/franchise matters, to the possibility that the TBPCO might be engaged.  To recognise a potential problem it was quite clearly not necessary to have sight of the franchise agreement whereby the step-in right was conferred upon the franchisor.  It is the fact of a transfer which triggers the application of the TBPCO, and the contractual entitlement to take such a transfer merely explains the origin of or motive behind the transfer.  All that matters is that, on an objective appraisal of all the circumstances, a transfer has taken place.

71.  Unfortunately, it is apparent that Mr Davidson was not familiar with the TBPCO.  His impression was that it related to protection of creditors; but the other side of the equation, namely that the protection was at the expense of the transferee, was ignored.

72.  In these circumstances, the obvious potential problem was not mentioned in the 22 May Call.  The 22 May Call was part of the performance of the retainer (as can be seen from the defendant’s invoice) which was formally documented in the form of an engagement lettersubsequently. The terms of that letter, which were admittedly tracked from the initial instruction of Mr Buckland, are plainly sufficient to catch matters closely connected with and consequential upon the potential termination of the franchise.

73.  As submitted by the plaintiff, context is the surer guide to interpretation. The retainer arose before the 22 May Call. The email of 18 May 2012, and the knowledge of the fact (as derived from that email) that Dymocks was seeking advice on unexpected problems which might arise from the intention to terminate the franchise and take over the franchised business, were the background matrix against which the terms of the Engagement Letter should be understood.

74.  The defendant, however, says it was under no duty to advise on the TBPCO.  It is said that during the course of the 22 May Call, Mr Buckland cut down considerably the scope of the advice which he was seeking (and therefore limited considerably the scope of the retainer).  In that regard, I agree the defendant has a heavy burden to discharge.  As Lightman J remarked in Hurlingham Estates Ltd v Wilde & Partners [1997] S.T.C. 627 at 630d-f:

“The second remarkable feature is that there is no written record of the alleged (but disputed) agreement to limit the solicitors’ duties. Any such agreement must plainly, if it is to have any legal effect, be clear and unambiguous: the client must be fully informed as to the limited reliance he may place on his solicitor and the reason for it … Common sense requires that all these matters should be recorded in an attendance note of the meeting where they are discussed and agreed, and should subsequently be recorded in a letter to the client. The letter is required, not merely to evidence what has been agreed, but to ensure that, after receipt of the letter, the client can consider (and discuss with others) the position and its implications away from, and free from any constraints imposed by, the presence of the solicitor.” (emphasis added).

75.  For reasons detailed below, and particularly by looking at the inherent probability and contemporaneous documents, the matters discussed in the 22 May Call could not have had the effect of narrowing down the defendant’s scope of duty.  Applying the dictum of Lightman J in Hurlingham,(i) there was no written record of the alleged agreement to limit the defendant’s duties; (ii) there was no clear and unambiguous agreement; and (iii) the facts and circumstances said to give rise to the narrowing down of the scope of the retainer were neither recorded in an attendance nor in any subsequent letter.

76.  Furthermore, it is trite that if in the course of carrying out instructions a lawyer notices or ought to notice a problem or risk for the client of which it is reasonable to assume the client may not be aware, the lawyer must warn him.  Hence, even if the defendant’s duty was restricted to advising on property law, that did not absolve it from the duty to warn Dymocks on the TBPCO. 

77.  On causation, the defendant contends that the plaintiff would still have suffered the same loss even if it had been duly advised on the TBPCO, and that the defendant’s breach was not the effective cause of that loss.  Those submissions, as analysed below, are devoid of merit.

E.     Scope of Duty

E1.    The correct approach

78.  The question is whether the duty to advise on the potential application of the TBPCO and its implications either fell within the defendant’s express retainer, or alternatively that there was an implied retainer for the defendant to do so in that it was reasonably incidental to the express retainer.

79.  The express retainer is contained in the Engagement Letter and this is common ground.  The Engagement Letter should be interpreted in accordance with general principles of contractual interpretation.  It is wrong to say that it “must be construed strictly”.  The general principles on contractual interpretation are trite:

(1)  “When interpreting a contract, the court is concerned to find the intention of the party or parties, and it does this by identifying the meaning of the relevant words, (a) in the light of (i) the natural and ordinary meaning of those words, (ii) the overall purpose of the document, (iii) any other provisions of the document, (iv) the facts known or assumed by the parties at the time that the document was executed, and (v) common sense, but (b) ignoring subjective evidence of any party's intentions.” (emphasis added): Marley v Rawlings [2015] AC 129 at §19 per Lord Neuberger.

(2)  Context is the surer guide to interpretation, and the contract and contractual provisions under consideration must be viewed against the relevant background and factual matrix: Fully Profit (Asia) Limited v Secretary for Justice (2013) 16 HKCFAR 351 at §15 per Ma CJ; Jumbo King Ltd v Faithful Properties Ltd (1999) 2 HKCFAR 279 at 296D-I per Lord Hoffman.

80.  The defendant in its submissions adopted an unduly narrow and technical approach in construing the terms of the Engagement Letter.  These submissions ignore the width of the phrase “in relation to” and treat it as the same as “on”.  They pay no regard to the context or background matrix.  I agree that approach is contrary to well-established principles of contractual interpretation and is wrong. 

81.  On implied retainer, matters which fairly and reasonably arise in the course of carrying out the express instructions must be regarded as coming within the scope of the retainer:Jackson & Powell, §11-169.  In this regard, the dictum of Laddie J in Credit Lyonnais SA v Russell Jones & Walker [2002] EWHC 1310 (Ch) at §28 is illuminating:

“A solicitor is not a general insurer against his client’s legal problems. His duties are defined by the terms of the agreed retainer. … [T]he solicitor only has to expend time and effort in what he has been engaged to do and for which the client has agreed to pay. He is under no general obligation to expend time and effort on issues outside the retainer. However if, in the course of doing that for which he is retained, he becomes aware of a risk or a potential risk to the client, it is his duty to inform the client. In doing that he is neither going beyond the scope of his instructions nor is he doing “extra” work for which he is not to be paid. He is simply reporting back to the client on issues of concern which he learns of as a result of, and in the course of, carrying out his express instructions. In relation to this I was struck by the analogy drawn by Mr Seitler. If a dentist is asked to treat a patient’s tooth and, on looking into the latter’s mouth, he notices that an adjacent tooth is in need of treatment, it is his duty to warn the patient accordingly. So too, if in the course of carrying out instructions within his area of competence a lawyer notices or ought to notice a problem or risk for the client of which it is reasonable to assume the client may not be aware, the lawyer must warn him”. (emphasis added)

E2.    Express retainer

The Engagement Letter

82.  The starting point is that the phrase “in relation to” in the Engagement Letter is a term of the widest meaning.  It is plainly competent to catch the issues arising from the taking over of the Business as a consequence of the termination of the Franchise Agreement.

83.  Notably, the scope of work under the Engagement Letter tracked the wording in Mr Buckland’s email of 18 May 2012. 

84.  As this court observed, the phrase “in relation to” appears twice in the Engagement Letter (see: paragraph 22(2) above).  The first “in relation to”, ie “in relation to dispute with Info-Vantage”, identifies the name of the franchisee (Info-Vantage), and that there is a dispute with it which might give rise to a termination of a franchise.  I agree it does not restrict the scope of the retainer in any way.

85.  It is more important to scrutinise the context and the background to ascertain the objectively manifested mutual intention of the parties as long as the contractual language is not violated. 

Context/background: before the 22 May Call

86.  In the email of 18 May 2012which was entitled “Norton Rose – HK Commercial/Franchise Lawyer” from Mr Buckland to Fiona Wallwork of Norton Rose Australia, Mr Buckland expressly stated that Dymocks had a franchise dispute in Hong Kong revolving around its intention to terminate a franchise and “step-in to the store”, and before Dymocks took “final action”, he would like to “speak to a lawyer with experience in Hong Kong to confirm that [their] approach [would] not run into any unexpected problems”.

87.  Mr Davidson accepted in his evidence that the email of 18 May 2012 indicated a potentially broad area for advice. 

88.  This initial email was reviewed by Mr Davidson on 21 May 2012 who was put in touch with Mr Buckland through Norton Rose Australia as an experienced Hong Kong lawyer able to assist on commercial/franchise issues. 

89.  Also on 21 May 2012, Mr Buckland requested by email to discuss the situation with Mr Davidson and obtain some “verbal advice” to confirm Dymocks’ strategy.  Mr Davidson replied “yes we can certainly speak”, and ran a conflict check.  This led to the arrangement of the 22 May Call, which Mr Buckland was entitled to assume was for the purpose of giving the verbal advice that he had requested.

90.  In cross-examination, Mr Davidson said he understood that the email of 21 May 2012 from Mr Buckland narrowed down the initial request, because the 21 May 2012 email talked only about a dispute in Hong Kong without referring to stepping-in.  I agree with the plaintiff’s submission that this is a fanciful construction, devised with a view to bolstering the defendant’s case: –

(1)  This assertion was raised for the first time in cross-examination.

(2)  Indeed, the 21 May 2012 email did not even refer to a franchise or to Dymocks’ intention to terminate a franchise.  By saying “to confirm our strategy”, Mr Buckland plainly referred to what he had said earlier in the 18 May 2012 email.

91.  Pausing here, as submitted by the plaintiff, it is clear that a retainer had arisen on 21 May 2012 by conduct (Dymocks sought verbal advice and the defendant said yes), and it was subsequently reduced into writing in the form of the unsigned Engagement Letter dated 24 May 2012.  There was only one retainer throughout with the same scope of duty.  The 22 May Call was charged as part of the performance of that retainer: see the defendant’s invoice.

92.  I agree the 22 May Call cannot be treated as a mere introductory call.  The client asked for verbal advice to be given during that call and the defendant did not indicate any unwillingness to comply with that request.  Both Mr Davidson and Mr Ridgeon accepted in cross-examination that they never told Mr Buckland that the call was introductory or for the purpose of getting instructions only.  Prior to the call Mr Davidson should have given to Mr Ridgeon a copy of the email from Mr Buckland to Fiona Wallwork and a copy of the email from Mr Buckland to himself and they should both have given their best thought to the question asked, based on the information available.

93.  Before the 22 May Call started, Mr Davidson and Mr Ridgeon had a discussion to consider possible issues that could arise or might be considered at the forthcoming call.  Mr Ridgeon jotted those down in the Attendance Noteas items (1), (2) and (3).

94.  Item (2) was “Restrictive covenants + employment law”.  In this regard, I accept the plaintiff’s submission that they must have considered the “employment law” issue in the context of taking over the employees from the franchisee as part of taking over the Business operated in the store: –

(1)  This accorded with how the phrase “step-in to the store” in the initial email of 18 May 2012 should ordinarily be understood in a franchise context.  Mr Davidson was aware that franchise agreements generally have step-in rights.  He accepted that in franchise parlance, step-in could mean a franchisor stepping into the rights of a franchisee, stepping into the shoes of a contractual counterparty and stepping into the business operated by the franchisee.  He could not seriously have thought that “step-in to the store”, a phrase used by a lawyer, should mean colloquially physically stepping into the Shop Premises.  Furthermore, I agree the phrase is inapt to describe taking repossession of leasehold premises.  Upon repossession, the tenant’s interest ceases, so he has no rights that can be taken over.

(2)  In fact, Mr Davidson only (allegedly) changed his understanding on those words as a result of the discussion during the 22 May Call.

(3)  In cross-examination, Mr Davidson said that “employment law” under item (2) was a reminder that employment law was relevant in the way that in which “restrictive covenants” under the franchise agreement should be looked at or construed.  Thiswasechoedby Mr Ridgeon who said he then had in mind the cases judicially decided in an employment context.  I agree with the plaintiff that this explanation is wholly unconvincing and should be rejected.  The discussion was a “brainstorm” exercise (although apparently there was very little time for serious consideration) and they were supposed to identify issues only.  It is improbable that they would talk about checking case law in employment context to assist in construing restrictive covenants.  This is particularly bearing in mind that the “restrictive covenants” in question were allegedly those under the franchise agreement, and not ones under an employment contract.

95.  In sum, it is quite plain that Mr Davidson knew or ought to have known by reviewing the email of 18 May 2012 that it was Dymocks’ intention to take over the Business of the store upon the termination of the franchise. 

96.  To summarise the position: –

(1)  The retainer/contract of engagement arose before the 22 May Call by conduct.  The relevant background matrix for the purpose of contractual interpretation were the email exchanges before the 22 May Call. 

(2)  The phrase “in relation to the potential termination of a franchise in Hong Kong” in the Engagement Letter should be understood in light of the knowledge of the fact (as derived from the email of 18 May 2012) that Dymocks was seeking advice on the unexpected problems which might arise from its intention to terminate the franchise and take over the Business of the store upon such termination.

(3)  Thus analysed, advising on the potential application of the TBPCO and its applications clearly fell within the scope of duty of the defendant.

97.  A reasonably competent solicitor held out to be a specialist in commercial/franchise field should immediately have been alerted to a potential problem under the TBPCO upon becoming aware that it was his client’s intention to take over the business from the franchisee, as that might cause the unexpected problem of imposition of the past debts of the franchisee upon the client.  The defendant however failed to even mention the potential application of the TBPCO during the 22 May Call, and in the context Mr Buckland was entitled to assume that Hong Kong law presented no problem to the strategy that he described, with the possible exception of the issue of repossessing the Shop Premises.  The defendant did not seek any clarification from Dymocks as to what they intended to do with the Shop Premises following the recovery of possession, and Mr Buckland was entitled to assume that both Mr Davidson and Mr Ridgeon had understood first that it was Dymocks’ intention to “step-in to the store” (or take over the franchised business), and secondly that he was seeking verbal advice during the call to ensure that Dymocks would not run into “unexpected problems”, before taking final action.

Context/background: non-provision of the Franchise Agreement

98.  As noted above, the Franchise Agreement was not provided to the defendant prior to the 22 May Call (and indeed thereafter until 6 December 2012).  Although this fact may form part of the background against which the Engagement Letter should be construed, but I agree in the present case it is neither here nor there: –

(1)  It is the fact of taking over or taking a transfer of the Business that matters for the purpose of triggering section 3 of the TBPCO, rather than the mechanics of doing so.  In §44 of its Judgment in the Confidence Action, the Court of Appeal cited the following passage in the leading case on the TBPCO decided by DHCJ Reyes SC (as he then was) and reported as [2002] 2 HKLRD 156:

“... The court considers all surrounding circumstances objectively and draws an inference whether, on the balance of probability, there has been a transfer. As Huggins J more succinctly put it in Elson-Vernon Knitters Ltd v Sino-Indo-American Spinners Ltd [1972] HKLR 468, the court is ‘not concerned with the mechanics of the transfer but with the fact of transfer’.” (emphasis added)

(2)  Given that the defendant clearly knew Dymocks’ intention to take over the Business of the store, it was unnecessary for it to know the exact mechanism of the taking over of the Business under the Franchise Agreement in order for it to warn that the statute might be engaged, during the 22 May Call or thereafter.

The 22 May Call – did it limit the contractual retainer?

99.  The next issue is the effect of the discussion between the parties in the 22 May Call on the scope of the express retainer. 

100.  As pointed out above, the court should be slow to find that there was an oral agreement circumscribing the scope of retainer: see the dictum of Lightman J in Hurlinghamquoted in §74 above. 

101.  There is acutely conflicting witness evidence on the contents of the 22 May Call.

(1)  On Mr Buckland’s evidence, he told Mr Davidson that Dymocks was in need of legal advice arising from the potential termination of the Franchise Agreement under Hong Kong law and he did not ask or instruct Mr Davidson to only advise on Hong Kong property law issues.

(2)  In contrast, on Mr Davidson’s evidence, during the telephone call, Mr Buckland “wanted [the defendant] only to consider Dymocks’ lawful means for recovery of possession of the franchisee's premises located at IFC”. 

(3)  In cross examination, Mr Ridgeon said it was crystal clear to him that Mr Buckland only asked for a specific lease question and shut down any possible advice on anything else, after rambling on for the best part of the 20-minutes call about background information.

102.  The 22 May Call took place more than 7 years ago.  I agree it is more reliable to test the evidence of the witnesses against inherent probability and contemporaneous documents.   

103.  In this regard, I accept the plaintiff’s submission that Mr Buckland’s evidence is to be preferred over that of Mr Davidson and Mr Ridgeon. The following points are important in this context.

104.  First, Mr Buckland’s evidence is perfectly consistent with his stated intention in the email of 18 May 2012.  

105.  Second, Mr Buckland is an experienced Australian solicitor.  He is also said to be costs conscious. It is inherently improbable that he would specifically limit himself to a property law question during the 22 May Call after talking about all the background information in relation to the termination of the franchise.  If that was his purpose, he could have asked to speak to a Hong Kong property lawyer instead of a commercial/franchise lawyer in the email of 18 May 2012, as indeed he subsequently did in October 2012.

106.  Third, paragraphs 11 and 12 of Mr Davidson’s Witness Statement in fact do not say Mr Buckland “said” he wanted the defendant only to consider Dymocks’ lawful means for recovery of possession of the Shop Premises.  The evidence was expressed in terms of an impression.  The same applies to paragraphs 8 and 12 of Mr Ridgeon’s Witness statement.  It is indeed surprising that Mr Ridgeon became much more assertive in cross-examination and claimed that Mr Buckland asked a specific property question and shut down any possible advice on anything else.  He was clearly not so confident in his Witness statement dated 24 October 2016 which, being closer in time to the events under consideration, should better represent his memory.

107.  As submitted by the plaintiff, the oral testimony of Mr Davidson and Mr Ridgeon demonstrate that they did not in fact remember what were actually said in the 22 May Call: –

(1)  Initially, Mr Davidson said Mr Buckland told them during the call that he was a property lawyer but he did not know about Hong Kong property law.  However, at a later stage, Mr Davidson said Mr Buckland told them that he was not a property lawyer.  This is self-contradictory.

(2)  Mr Davidson said the reference to “step-in” in the Attendance Note was likely used by Mr Ridgeon, but Mr Ridgeon said it was used by Mr Davidson or Mr Buckland.  It is overwhelmingly probable that it was Mr Buckland who used the phrase, because he was explaining the content of the letter which had been received from Messrs V Hau & Chow, the solicitors for Info-Vantage Limited: –

“Our client also undertakes that if any one single payment is in default, your company will be entitled to take action to claim the Outstanding Sum that remains owing and take over the IFC store forthwith”.

(3)  Mr Davidson said the “arrears” which Mr Buckland talked about were only rental arrears, whilst Mr Ridgeon said “arrears” would include arrears other than rent.

108.  Fourth, I agree that a sensible re-construction of the Attendance Note would be as follows: –

(1)  At the beginning Mr Buckland talked about the Franchise Agreement being governed by NSW law.  Hence the references to “Advixxx Franchisee – NSW law – incorps commonwealth law + national law + procedures re grant of Franchise”.

(2)  It was also probably at that juncture that Mr Buckland refused the request to provide the Franchise Agreement on the ground that it was not necessary for the defendant to advise on the issues on which he sought advice, because the defendant did not need to review whether Dymocks had valid grounds to terminate the Franchise Agreement which was governed by New South Wales law.  It cannot be suggested that this is inconsistent with his intention to seek advice on unexpected problems that might arise from the intention to terminate the franchise and take over the Business.  As he explained in his oral testimony:

“Because my advice was focused -- or my request for advice was focused on the consequence of the termination, not the termination itself, I did not see how the franchise agreement was relevant. However, if it had been drawn to my attention that there were issues they needed to consider for the consequences, I would have provided it.”

This may be a slightly subtle point but I agree is perfectly valid.  As an example, provision of the Franchise Agreement would not improve the ability of the defendant to spot the potential problem regarding the TBPCO at all.

(3)  Then, until the fourth last line of the Attendance Note (ie “Check with Property lawyer”), it is apparent that Mr Buckland talked about the background facts of the franchise dispute, and the strategy that had so far been employed as a result of the franchisee’s default, including:–

(a) that there had been arrears for some time and the franchisee’s payment plan had allowed the arrears to build up;

(b) issuance of the Notice of Termination;

(c) “Normal practice – persuade to try to sell store – another Franchisee.  Didn’t try to sell business – Notice of Termination issued – 30 days”;

(d) that there has been discussion with the franchisee for a while;

(e) the existence of the fixed and floating charge and the nature of the franchisee’s occupancy rights at the store;

(f) the latest proposal from Info-Vantage’s lawyer (V Hau & Chow) on repayment plan which stated that if the proposal was accepted Info-Vantage would not challenge “step-in”;

(g) the partnership with SCMP; and

(h) that there had been rental arrears.

(4)  The provision of the background facts of the franchise dispute was consistent with the broad area of advice requested in the email of 18 May 2012.

(5)  There were then, at the tail-end of the Attendance Note, the following references:

“Check with Property lawyer

300k –”

(6)  The last two references after a dividing line, ie “May be still a tenancy” and “Berlusconi search warrant vs Paddy Chan & Harmony Good”, were apparently jotted down at the end of or after the call. 

109.  As submitted by the plaintiff, there is nothing in the Attendance Note which is capable of supporting the allegation that Mr Buckland indicated to the defendant that he only wanted advice on lawful means for recovery of possession of the Shop Premises or that Mr Buckland wanted to limit the scope of his instructions set out in his emails dated 18 May 2012 and 21 May 2012. 

110.  Indeed, there is nothing which even indicated Mr Buckland proactively requested property law advice. 

111.  I agree it is inconceivable that Mr Ridgeon would have missed out the express instructions from the client in taking notes when he apparently had jotted down all the background facts provided by Mr Buckland.

112.  As a matter of inherent probability, it is likely that after Mr Buckland provided all the background information, it was Mr Davidson who saw repossession of the Shop Premises as a potential problem under local law if the negotiation with the franchisee broke down and the franchisee challenged “step-in” (Mr Ridgeon said the discussion was in the context of where the negotiations with the franchisee would fail); he offered to check with a property lawyer within the defendant on the issue.

113.  Fifth, it was put to Mr Buckland in cross-examination that he did not indicate the various concerns of SCMP to Mr Davidson. The suggestion appears to be that he therefore was not seeking broad advice from the defendant.  The answer of Mr Buckland in this regard is sensible: if he confined the issues immediately, he might close out the defendant’s attention to other issues.

114.  Sixth, it is suggested by the defendant that the truth of the matter was that because of the proposal contained in the letter from V Hau & Chow, Mr Buckland’s initial concerns indicated in his email of 18 May 2012 fell away, because Dymocks would have the benefit of an uncontested right to get back into the store, so he was only interested in how easy it would be to enforce that right if and when it became necessary to do so.  This suggestion is contrary to the evidence and inherently improbable. 

(1)  It is contradictory with Mr Ridgeon’s evidence that the discussion on property law issues was to cover the possibility that the negotiation with the franchisee would fail (paragraph 8 of his witness statement), instead of the enforcement of the right upon subsequent failure to comply with the new repayment terms.

(2)  It is also contrary to business common sense.  At that stage, the negotiation was still at the initial stage and there must have been a real possibility that it could break down at any time.  As Mr Buckland explained in his testimony, Dymocks was pursuing multiple strategies including potentially reaching a deal with Robert Chan, and continuing down the path of enforcement. 

115.  Seventh, Mr Davidson was not only considering the lawful means for recovery of possession of the Shop Premises as he alleged.  He also advised in his email dated 25 May 2012 on the commercial risk of Dymocks being strung along on entering into a settlement with Info-Vantage and the continuous obligation on the part of Dymocks to pay rent in the meantime.  This, on any view, is beyond the alleged “discrete question” allegedly raised by Mr Buckland.

116.  Given the aforesaid, I hold that the defendant has failed to discharge the heavy burden (reflected in the dictum of Lightman J in Hurlingham) to show that what was said in the 22 May Call were so clear and unambiguous that there was an agreement to limit the express retainer.

Other miscellaneous points raised by the defendant

117.  First, I agree the reliance on the email of 25 May 2012 is misplaced.  The statement of Mr Davidson that “I anticipate our fees for reviewing and advising on these issues surrounding the possession recovery process should be no more than around US$2-3k” plainly does not have the effect of limiting the scope of the retainer.  It is not disputed that part of the defendant’s retainer was to address the property law issues.  The statement however did not represent any agreement that the defendant should only advise on property law issues.  The fact that during the 22 May Call, Mr Davidson and Mr Ridgeon raised property law issues only led Mr Buckland to believe that they were the pertinent issues on the “unexpected problems” that he needed to be aware of and he was therefore not surprised when the email of 25 May 2012 referred to property issues only.

118.  Indeed, if Mr Davidson intended to limit the scope of the retainer, the Engagement Letter attached to the 25 May 2012 email was the only logical place for him to do in accordance with proper practice such that Mr Buckland would have a proper chance to protest.

119.  Second, the suggestion that the defendant was entitled to proceed on the basis that Dymocks / the plaintiff was fully capable of precisely stating the specific issue it wanted advice on and therefore matters which were not specifically and precisely raised need not be considered is clearly flawed.

(1)  The defendant was put in touch with Mr Buckland (as the Company Secretary of “Dymocks Group of Companies” with an Australian address) through Norton Rose Australia.  Mr Buckland was known by the defendant to be an Australian lawyer.  He came to seek advice on Hong Kong law to ensure that Dymocks would not run into any “unexpected problems”. 

(2) In those circumstances, I agree it is clearly incorrect to say that the defendant was entitled to assume that Mr Buckland was capable of identifying the precise Hong Kong law issues.  Mr Davidson accepted that he would not expect Mr Buckland to know about the TBPCO.

120.  Third, the defendant suggested that Dymocks / the plaintiff did not genuinely believe in May 2012 that they were getting advice on a basis wider than the narrow property advice actually given by the defendant.  This is a point of no merit:

(1)  The defendant did give property law advice, and it is accurate to describe the advice given by the defendant after the 22 May Call as property law advice.  As said, property law issues were identified by the defendant to be the relevant area issues in which the plaintiff might encounter “unexpected problems”, and therefore needed advice.

(2)  The reasons why the plaintiff did not make a complaint earlier than October 2013 can be found in the evidence of Mr Forsyth.  He believed that the plaintiff had a fair chance to contend that the TBPCO did not apply and was hopeful that the S.8 Payment could dispose of all the claims.

E3.    Implied retainer

121.  The question on implied retainer is whether, in the course of carrying out the express instructions, the defendant noticed or ought to notice the risk regarding the application of the TBPCO for Dymocks of which it was reasonable to assume that it might not be aware: see the passage in Credit Lyonnais quoted in §81 above.

122.  As discussed above, a potential problem should have registered in the minds of Mr Davidson and Mr Ridgeon when they became aware that Dymocks’ intention was to take over the Business of the store from the franchisee.  Thus, even if Mr Buckland only wanted discrete advice on property law in the 22 May Call, the defendant plainly had the duty to warn Dymocks on the potential application of the TBPCO.  It would be reasonable for the defendant to assume that Mr Buckland, who came from a foreign jurisdiction, might not be aware of the unique local legislation.  Mr Davidson accepted that he would not expect Mr Buckland to know about the TBPCO.

F.     Factual Causation

123.  In the case of negligent advice, where the complaint is for failure to give proper advice (nonfeasance), the claimant has to show what advice should have been given and that if such advice had been given, he would not have entered into the relevant transaction or would not have entered into it on the terms he did: Bristol and West Building Society v Mothew (t/a Stapley & Co) [1998] Ch 1, at 11B-D per Millet LJ (as he then was).

124.  In this regard, the defendant submits that the plaintiff would have proceeded with the takeover of the Business at the Shop Premises even if it were aware of the TBPCO, and the plaintiff could not have averted liability to creditors such as Confidence under the TBPCO.

125.  As to the question of what advice should have been given, as of 28 May 2012, Info-Vantage owed HK$3,377,882 to creditors (excluding the plaintiff).  The total stock on hand was worth about HK$2.1 million.  As the stock was subject to retention of title clauses, the plaintiff’s exposure to liability on taking over the business was then only about HK$1.27 million.

126.  In that factual context, I accept the plaintiff’s submission that the defendant should have given the following advice: –

(1)  There is a real risk that if the plaintiff takes over the Business, the TBPCO might apply and the plaintiff might become liable to the debts of Info-Vantage arising out of the carrying on of the Business under section 3.

(2)  The plaintiff should not be strung along by the repayment proposal of Info-Vantage as there will be a real risk that Info-Vantage will continue to build up its trade debts and the plaintiff’s exposure on liability will increase in an uncontrollable way.

(3)  The plaintiff should cause a notice of transfer under sections 4 and 5 of the TBPCO (“Transfer Notice”) to be published as soon as possible, stating the date of transfer to be 1 month after the date of last publication of such notice, with a view to limiting its liability.

(4)  If Robert Chan is not cooperative and refuses to sign the Transfer Notice, the plaintiff could invoke the power of attorney provision (Cl 20.1) under the Franchise Agreementto sign the Transfer Notice on behalf of Info-Vantage.  That provision allows the plaintiff to act as attorney of Info-Vantage to give effect to any right or power conferred on the plaintiff under the Franchise Agreement as may be necessary or expedient.  That would include the right to purchase business assets of Info-Vantage under Cl 15.6 which is the provision to effect the taking over of the Business.

(5)  Where creditors commence legal proceedings against Info-Vantage within the 1-month period, the Transfer Notice for the purpose of such proceedings would be deemed incomplete pending their final determination as against the creditor who commences proceedings (section 4(5) of the TBPCO), and the plaintiff might be joined to those legal proceedings and exposed to those claims if it takes over the Business.  Subject to that, the Transfer Notice will become complete (section 4(4) of the TBPCO), and the plaintiff shall not become liable under section 3.

(6)  Therefore, the plaintiff should consider the size of creditors’ claims through a writ search, and decide whether to proceed with taking over the Business after the expiry of the 1-month period notwithstanding the exposure to those claims.

127.  Had the correct advice described above been duly given in the 22 May Call or shortly thereafter: –

(1)  Dymocks would have caused a Transfer Notice under sections 4 and 5 of the TBPCO to be published in around early June 2012.

(2)  With hindsight, only Confidence and Madam Li Fung Oi would have possibly commenced legal proceedings during the 1-month period, in which case their right to sue the plaintiff after the transfer would be preserved.  This is because in reality, even when the plaintiff gave direct notice to the creditors of Info-Vantage in December 2012 by way of letters (as opposed to government gazette or newspapers advertisement required by section 5 of the TBPCO), only these 2 creditors started legal proceedings.

(3)  Prior to 4 July 2012, the amount owed by Info-Vantage to Confidence was only HK$75,156.  The amount owed by Info-Vantage to Madam Li Fung Oi was at most HK$30,662.50.

(4)  In such counterfactual scenario, the plaintiff would have taken over the Business in early July 2012; and since the claims by Confidence and Madam Li totalled only HK$105,818.50, and the claims of other creditors were by then barred, it would not have defended the claims and would have settled them. In such circumstances, the loss and damage now suffered by the plaintiff arising from the creditors’ claims would have been avoided. The evidence of Mr Buckland in this regard was unchallenged in cross-examination.

(5)  The situation facing the plaintiff after December 2012 was very different from the above counterfactual scenario.  In the actual situation, the transfer had taken place and all suppliers received direct notice from the plaintiff on the transfer.  Confidence made a claim of HK$1.27 million against the plaintiff.  While the plaintiff only ascertained the exact figure of the indebtedness of the Business being HK$12 million after July 2013, before the Confidence Action was commenced in June 2013, it already knew that the total amount of the potential claims by creditors was in terms of millions: see the email of 8 May 2013, which shows that Dymocks thought that the total liability to creditors amounted to HK$5.5 million at that time.  The unchallenged evidence is that settling the claim with Confidence might open a floodgate for other creditors who had a year to make a claim pursuant to section 9 of the TBPCO.  That being the case, it is plain that the plaintiff would have settled the claims made by Confidence and Madam Li in the counterfactual scenario when the amount was much lower and the claims of all other creditors would have been barred.

128.  Alternatively, if the plaintiff were unable to cause a valid notice to be published because of want of proper signature from Info-Vantage under section 5 of the TBPCO, had proper advice been duly given by the defendant in May 2012, it would have repossessed the Shop Premises on 6 June 2012 but refrained from taking over the Business.  It would have sublet the Shop Premises to another entity or surrendered the site to the landlord, who would have consented to that because it could get a significantly higher rental at the material times.  Mr Buckland’s and Mr Cox’s evidence in this regard was not challenged.  The same would have been done if a potential problem under the TBPCO had been raised by Mr Davidson on 6 December 2012, in which case the plaintiff would have been in a position to decide not to open the store and operate the Business on the following day.

G.     Legal Causation

G1.    Alleged non-reliance/intervening acts by the plaintiff

129.  If the immediate cause of the damage in question was some unwise action or inaction on the part of the claimant, then the court may hold that the chain of causation has been broken: Jackson & Powell at §11-250.

130.  I agree that, in this regard, each of the points made by the defendant is clearly of no merit: –

(1)  The defendant submitted that the plaintiff did not rely on the property law advice given by the defendant and sought a second opinion on property law.  But property law advice has nothing to do with the loss and damage suffered by the plaintiff, which was caused by the defendant’s failure to give advice on the TBPCO.

(2)  Another point made by the defendant is that the plaintiff did not require further advice from the defendant from 6 June 2012 onwards.  It is extremely difficult to see how not requiring further advice from the defendant could constitute the effective cause of the damage.  The duty was on the defendant to spot the issue, and the wrong occurred before 6 June 2012.

(3)  The defendant made the further point that the plaintiff preferred to rely on its own judgement (as allegedly evident from the email of 21 December 2012), and it further sought advice from counsel (Mr Clark) regarding the TBPCO.  The truth was that Mr Buckland gave certain views on the TBPCO without proper legal advice and instructed the defendant to draft a letter “subject to [their view]”; the defendant researched on case authorities, drafted the letter as requested and sent it out to Confidence’s solicitors.  Mr Davidson accepted that he would not simply do what client wanted or asked him to do but would look at the issues.  The defendant subsequently represented the plaintiff in the Confidence Action, and counsel’s advice was also sought through the defendant.  I agree the causative potency of the breach by the defendant cannot conceivably have been obliterated in these circumstances.

131.  The defendant also takes issue with the costs incurred in respect of the Striking Out Application and the Appeal, and says they arose because of the plaintiff having unreasonably pursued the Non-Transferee Defence.  The unchallenged evidence is that the plaintiff was advised by the defendant and Mr Clark to resist the Striking Out Application, to pursue the Non-Transferee Defence and to lodge the Appeal.  The chain of causation is plainly not broken when the plaintiff has acted reasonably on proper legal advice from counsel and the defendant itself.

G2.    Alleged intervening acts by third parties

132.  The defendant contends that the effective cause of the loss suffered by the plaintiff was the failure to give proper advice by third parties, including SCMP, Deacons and KLY.

133.  As submitted by the plaintiff, the applicable legal principles are as follows: –

(1)  “No precise or consistent test can be offered to define when the intervening conduct of a third party will constitute a novus actus interveniens sufficient to relieve the defendant of liability for his original wrongdoing.  The question of the effect of a novus actus ‘can only be answered on a consideration of all the circumstances and, in particular, the quality of that later act or event’.  Four issues need to be addressed.  Was the intervening conduct of the third party such as to render the original wrongdoing merely a part of the history of events?  Was the third party’s conduct either deliberate or wholly unreasonable?  Was the intervention foreseeable?  Is the conduct of the third party wholly independent of the defendant, i.e. does the defendant owe the claimant any responsibility for the conduct of that intervening third party?  In practice, in most cases of novus actus more than one of the above issues will have to be considered together”: Clerk & Lindsell on Torts, 22^nd ed, §2-111.

(2)  Deliberate interventions are more likely to break the chain of causation than negligent acts, negligent conduct is more likely to constitute a novus actus than non-negligent conduct, and positive acts are more likely to operate as novus actus than omissions: Clerk & Lindsell,§2-115.

(3)  The court has to make a value judgment in dealing with the question of causation, and the ultimate question is what is the extent of the loss for which a defendant ought fairly or reasonably or justly to be held liable: Chubb Fire v Vicar of Spalding [2010] 2 CLC 277, at §64 per Aikens LJ.

134.  First, SCMP was a shareholder of the plaintiff and assumed no duty to advise the plaintiff.  In October 2012, the plaintiff did obtain advice from Patsy Wong, a human resource professional of SCMP, in relation to what the plaintiff needed to do when it took over the Business from an employment perspective.  There is no evidence that Patsy Wong was legally qualified.  I agree SCMP’s conduct could not possibly be sufficient to constitute a novus actus.

135.  Second, in relation to the “advice from Deacons on the insolvency of Info Vantage” received by the plaintiff: –

(1)  The plaintiff claims legal professional privilege on its communications with Deacons.  It is trite that no inference can be drawn against a party for insisting on such privilege: Phipson on Evidence, 19^th ed, §23-22.

(2)  There is no evidence before the Court as to the scope of Deacons’ retainer, save that it concerns the impact of insolvency on the store when Robert Chan told the plaintiff that he would have to declare bankruptcy.  There is also no evidence as to the contents of the advice that Deacons gave.

(3)  Accordingly, there is no evidential basis to suggest that Deacons has done anything wrong which is sufficient to break the chain of causation. 

136.  Third, as regards KLY and the KLY Advice, it is plain that (unlike the position of the defendant as held by this court) KLY was only retained to advise on the limited property/lease issues.

(1) By email of 16 October 2016, Mr Buckland asked Vera Leung of the legal department of SCMP to recommend a law firm to give a second opinion on property law advice the plaintiff had received from the defendant, given that the plaintiff was not satisfied that they would have to spend 6 months in recovering the possession of the Shop Premises according to the defendant’s advice.

(2) On the recommendation of SCMP, Mr Buckland contacted KLY:

(a) On 16 October 2012 at 14:11, Mr Buckland emailed Amy Li of KLY, the subject of the email being “Property Dispute”, saying that they would like “advice regarding the rights and obligations of the parties in the event that the breach notice is not complied with”. 

(b) On 17 October 2012, there was a telephone conversation between Mr Buckland and Emmanuel Kao of KLY.  The meeting notes prepared by Mr Buckland stated:

“I gave Emmanuel a brief on the situation and advised that we wanted advice on what our rights and options are to take back the site.

Emmanuel indicated that the Norton Rose advice that the site could be taken back in 6 months was probably optimistic – it may take 9 months for an order for possession.” (emphasis added)

(3) By email dated 18 October 2012 at 7:03 pm to Mr Buckland, Matthew Yim of KLY requested a copy of the Franchise Agreement. By email of the same date at 7:34 pm to Matthew Yim and Emmanuel Kao, Mr Buckland. Buckland stated:

“On the basis that the Franchise Agreement is required for some issue associated with the property law question, I attach the Franchise Agreement (in 3 parts in this plus two additional emails).

Obviously we do not need advice on the Franchise Agreement, its breach or enforcement separate to the property law/lease issues.” (emphasis added)

(4) On 25 October 2012, KLY provided the KLY Advice which stated at the outset that:

“We are instructed to advise on recovery of possession of the Premises which have been underlet by the Franchisor to the Franchisee to operate the franchise business at the Premises.” (emphasis added)

137.  Accordingly, I agree that advice in relation to the TBPCO was clearly beyond the scope of KLY’s retainer.

138.  The defendant contends that KLY should be held negligent on the basis of implied retainer, ie that it noticed or ought to notice the potential application of the TBPCO and warn the plaintiff in the course of carry out its express instructions, and that this breach constituted a novus actus.  I agree with the plaintiff that this is not correct: –

(1)  Unlike the defendant, there is no evidence that KLY was expressly told about Dymocks/the plaintiff’s intention to step-in to the store or take over the Business before the KLY Advice was rendered.  Any such allegation was not put to the plaintiff’s witnesses.  It is true that KLY quoted Cl 7.2 of the Deed of Release in the written advice, but a contractual right is different from an avowed intention.

(2)  In any event, applying the law stated in §133 above, as a matter of value judgment, KLY ought not fairly or reasonably be held liable for the plaintiff’s loss.  The defendant was under an express retainer to advise on the unexpected problems arising from an intention to step-in to the store, while KLY was not.  A mere omission to warn the plaintiff when incidentally it ought to notice the problem did not render the original breach by the defendant under a wider retainer merely a part of the history of events.

H.     Conclusion

139.  For all the reasons stated above, I would allow the plaintiff’s claim against the defendant.  The plaintiff has suffered the following loss and damage: –

(1)  Amounts paid to Confidence in the Confidence Action, including (a) HK$1,400,000 being the settlement sum; (b) HK$71,700 being the 50% of the costs of the Amendment Application and the Striking Out Application; and (c) HK$150,000 being the costs of the Appeal and the Setting Aside Application;

(2)  Costs and disbursements incurred by DLA in representing the plaintiff in the Confidence Action in the sum of HK$2,069,215;

(3)  The legal fees paid to the defendant in the sum of HK$282,050 in relation to and in connection with claims made by Info-Vantage’s creditor pursuant to section 3 of the TBPCO; and

(4)  The S.8 Payment in the sum of HK$500,000.

140.  After netting off the total sum of HK$105,818.50 as stated in §127(4) above, I award the plaintiff damages in the sum of HK$4,367,146.50.

141.  I further order the defendant to pay to the plaintiff interest thereon from the date of writ to judgment at the rate of prime + 1% per annum. 

142.  The plaintiff’s liability to pay legal fees to the defendant was caused by the defendant’s breach of duty.  Thus, if paid, the plaintiff would be able to claim them back by way of damages.  In the circumstances, the defendant’s counterclaim on the unpaid legal fees of HK$1,249,719.30 should be dismissed.

143.  The costs of this action and the counterclaim be paid by the defendant to the plaintiff, such costs are to be taxed if not agreed with a certificate for 2 counsel.

144.  The above order as to costs is nisi and shall become absolute in the absence of any application within 21 days to vary the same.

145.  Lastly, I express my gratitude to counsel on both sides for their helpful assistance in this matter.