DIAGCOR BIOSCIENCE INCORPORATION LTD AND ANOTHER v. ZENDEX BIO STRATEGY INCORPORATED AND OTHERS

HCA 2733/2015

[2021] HKCFI 146

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 2733 OF 2015

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BETWEEN

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JUDGMENT

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A. Introduction

1.  The 1^st Plaintiff (“P1”)[1] was a Hong Kong company.  It carried on business in research and development of bio-medical diagnostic products and provided molecular diagnostic laboratory services in Hong Kong.  It had a plan (the “Plan”) to extend its service and products to the Mainland.  The plan involved the formation of a wholly owned foreign enterprise (“WOFE”) to hold an independent diagnostic/clinical laboratory (“ICL”) in the Mainland.  Whether that was possible would be dependent upon the regulatory rules and framework in the Mainland.  The Defendants (“D1”, “D2” and “D3”, and collectively “Ds”) became involved.  Ps say Ds were engaged for their expertise, network and resources to help Ps achieve the Plan.  Ds say it was a collaborative business venture.  In any event, things did not go smoothly.  Disputes arose, and there have been quite some of them.  Amongst Ps’ claims are breach of agreements, misrepresentation, breach of fiduciary duties, duty to account, conversion, conspiracy, and misappropriation of funds.

2.  This is the trial of Ps’ claims.

3.  Ps are represented by Ms Rachael Siu together with Ms Kinsey Kang.  Ds are represented by Mr Sunny Chan.

B. The parties and the persons involved

4.  I have described P1’s business above.

5.  P1 was founded by Professor Joseph Tam (“Dr Tam”) in 2006. Dr Tam was at the material time the Chief Executive Officer, a shareholder and director of P1.

6.  Diagcor International Limited (“DCI”) is a company incorporated in Hong Kong on 27 November 2012.  It is a subsidiary company of P1.

7.  廣州百皋醫學檢驗中心有限公司 (“Baigao”) is a company set up on 18 January 2013 by DCI in Guangzhou as a WOFE.

8.  P2 was a wholly-owned subsidiary of P1.  It was incorporated on 28 October 2013 as a foreign enterprise in the Mainland.

9.  D1 was a company incorporated in the British Virgin Islands (“BVI”). D2 was its Chief Executive Officer.

10.  Dr Tam and D2 first crossed path in the 1980s at the University of Hong Kong.  Dr Tam was the leader of the DNA research group with the Department of Biochemistry.  Dr Veronica Lam was one of the members.  D2 was back then a student with the Faculty of Science.

11.  D3 was a managing director of D1.

12.  D2 was appointed as one of the first directors and General Manager of P2 until he was removed on about 13 April 2015.

13.  D3 was appointed as one of the first directors and legal representative (法人代表) of P2 until she was removed also on about 13 April 2015.  

C. Parties’ pleaded case

C.1. Ps’ pleaded case

14.  Ps’ Amended Statement of Claim is dated 16 December 2016 (“ASOC”).

15.  The facts (and the causes of action which they are pleaded to have given rise to) are pleaded and laid out in 2 stages:

(a) Stage I — Setting up ICL through DCI[2]; and

(b) Stage II — Setting up and operation of ICL through the “Mainland and Hong Kong Closer Economic Partnership Agreement” (“CEPA”)[3].

Why Ps chose to do so will be clear from the summary of Ps’ pleaded case set out below.

16.  Arising out of Stage I are the Misrepresentation Claim, the Breach of Agreements Claim and the Breach of Fiduciary Duties Claim.

17.  The Misrepresentation Claim[4]:

(a) In or about November 2011, Dr Tam told D2 about the Plan[5]. D2 expressed interest in cooperating with P1 in executing the Plan.  D2 further introduced D1 and D3 to P1[6];

(b) In the course of discussion on possible cooperation, D2 told Dr Tam that the company he worked for, ie D1, had all the necessary resources to obtain approval for forming a WOFE to provide diagnostic laboratory services in the Mainland, and that D2 himself had all the experiences and connections to succeed^[7]. D2 further represented to Dr Tam that[8]:

“ a [WOFE] can be set up by a new offshore company to provide medical diagnostic laboratory services in the PRC (‘the Representation’)”;

Particulars are then pleaded, which relate to what D2 was alleged to have told Dr Tam on 18 July 2012 and 30 July 2012, and certain written materials, which include in particular a written proposal sent by D2 to Dr Tam on about 23 July 2012 (the “Proposal”);

(c) Induced thereby and relying on the Representation, P1 and D1 entered into the Collaboration Agreement (the “Collaboration Agreement”) and the Commission Agreement (the “Commission Agreement”) both dated 8 November 2012;

(d) Subsequently DCI was incorporated in Hong Kong on 27 November 2012 as the offshore company, which in turn on 18 January 2013 incorporated Baigao as a WOFE in Guangzhou;

(e) Ps plead at §19 of the ASOC that the Representation “was false in that a WOFE could not practice in the industry of ICL”.  The particulars pleaded thereunder are:

“ (1) In or about 10^th May 2013, [D2], for the first time, informed [P] that DCI was required by Guangzhou Health Bureau to apply for status under [CEPA] because ICL is a prohibited service industry in the PRC and CEPA status is required in order for DCI to establish a WOFE in that service industry; otherwise the business licence could not be granted.

   (2)     In order to qualify for CEPA status, the applicant company must have at least 3 years’ business experience in the relevant service field, therefore DCI, being a company incorporated in Hong Kong for less than one year without any substantive business could not have satisfied the requirement for CEPA status.”

(f) The Representation was made by D2 with the express / implied, apparent / ostensible authority, permission / consent, knowledge, or acquiescence of D1[9];

(g) The Representation was made fraudulent or recklessly[10], or negligently[11]. Section 3 of the Misrepresentation Ordinance (“MO”) is also sought to be relied upon[12];

(h) P1 has suffered loss and damage, in the form of costs and expenses on hiring D1 under the Commission Agreement, on the establishment of DCI and Baigao, on the steps taken to obtain the necessary permits and licences for Baigao, and on setting up P2.

18.  The Breach of Agreements Claim[13]:

(a) In breach of the Collaboration Agreement and the Commission Agreement, D1 failed to obtain the necessary permits/licences for DCI to set up a private ICL in Guangzhou as WOFE from the Ministry of Health[14]; and

(b) In breach of the Collaboration Agreement and another Cooperation Agreement signed between P1 and D1 on 23 June 2014 (the “2014 Cooperation Agreement”), D1 had failed to introduce fund investment in the sum of USD 7,000,000 or any part thereof into DCI, P1, or P2[15].

19.  The Breach of Fiduciary Duties Claim[16]:

(a) It is pleaded that by virtue of the Collaboration Agreement, the Commission Agreement and/or Ds’ representation that they had the relevant experience, expertise and social networks, Ds’ undertaking to act in the interests of P1, and P1’s trust in and reliance on them, Ds or any of them owed the following fiduciary duties (the “Fiduciary Duties”) to P1[17]:

“ (1) A duty to have knowledge of and to ensure full compliance of all the relevant laws and regulations of the PRC in relation to the successful completion of the setting up and operation of a private ICL in the PRC, and in particular Guangzhou and Shanghai; and

(2)     A duty to provide all practical solutions to address the concerns of [P1] in respect of obtaining all necessary approvals, licences and consent from the relevant city and district regulatory authorities for successful completion of the setting up and operation of a private ICL in the PRC in particular Guangzhou and Shanghai.”

(b) Ds had failed to obtain the necessary permits to build a private ICL in Guangzhou as WOFE under DCI and were in breach of the Fiduciary Duties.

20.  Then came Stage II.  P1 avers that:

(a) upon finding out the restriction on a WOFE in establishing ICL, in order to mitigate its loss, P1 had no alternative but to continue to complete the establishment of the ICL in Guangzhou through the CEPA;

(b) On about 18 June 2013, the Government of Hong Kong issued CEPA certificate to P1.  P1 subsequently incorporated P2 in Guangzhou on 28 October 2013;

(c) As the management of P1 had no knowledge or experience in the setting up of an ICL in the Mainland, P1 depended on and trusted D2’s and D3’s expertise and experience in the same.  They therefore continued to act as consultants for P1.  Their duties included the setting up and facilitating operation of P2;

(d) For such purpose, D2 was appointed a director and General Manager of P2, and D3 was appointed a director and the legal representative of P2;

(e) In their capacity as consultants of P1, D2 and D3 owed P1 fiduciaries duties to act in good faith, not to act or place themselves in conflict, not to make secret profit, and duty to account.  D2 and D3 were further or alternatively trustees of P1’s asset and property and as such owed P1 various duties;

(f) As directors and senior management of P2, D2 and D3 owed P2 duties to act in good faith, not to misappropriate funds, not to make secret profit, not to commit fraud, and not to conspire with others by illegal means to injure P2’s interest;

(g) On 23 June 2014, P1 and D1 entered into the 2014 Cooperation Agreement to proceed to establish the ICL in Guangzhou in the name of P2;

(h) The following individual items, and the facts which gave rise to them, are pleaded to have taken place during this Stage II.  They are also pleaded in support of the Conspiracy to Defraud Claim and Breach of Fiduciary Duties Claim:

(i) the LIS Contracts,

(ii) the Sulong Agency Agreement,

(iii) the Secret Branch Office,

(iv) the Conversion, and

(v) the Misappropriation of Funds claims.

21.  The Conspiracy to Defraud Claim:

(a) At §47 of the ASOC, Ps plead that:

“ Since at least the beginning of 2014, [Ds], together with other people including Chen Qiu Jing (the former finance director of [P2]), had engaged in unauthorised and wrongful acts within [sic] the intent to injure and defraud [Ps] and the particulars are being set out hereinafter.”

(b) Ps have pleaded no particulars in the usual way in which particulars are provided, but proceed in the subsequent paragraphs to plead a number of individual claims, as follows.

22.  The LIS Contracts[18]:

(a) Ps plead that on 24 February 2014, D2 and D3 caused P2 to contract with Wu Fan, a person purportedly working for a company in Beijing called中軟 (「中軟」), for a software system to run lab services (the “LIS”) at the price of RMB 1,950,000 (the “1^st LIS Contract”);

(b) that price of RMB 1,950,000 was more than double the price of RMB 900,000 authorized by P2’s board of directors;

(c) As a result, P2 suffered loss in the sum of RMB 1,050,000;

(d) D3 further on the same day and without authority purported to sign on behalf of P2 another contract with D1 for development of LIS at the price of RMB 2,765,000 (the “2^nd LIS Contract”);

(e) Then on 25 February 2014, D3 again without authority signed on behalf of P2 a third contract with D1 for development of LIS (the “3^rd LIS Contract”), apparently superseding the 2^nd LIS Contract;

(f) the 2^nd and 3^rd LIS Contracts were a sham as it was Wu Fan who was responsible for developing the LIS, but not D1.  In any event, no LIS was ever developed and set up by D1 for P2;

(g) On 2 April 2014, D2 and D3, with the assistance of Chen Qiu Jing (“Chen QJ”), caused P2 to transfer to D1 RMB 2,765,000, (converted into HK$3,448,060.86), being the contract price under the 2^nd or 3^rd LIS Contract;

(h) As a result, P2 suffered loss in the amount of HK$3,448,060.86.

23.  The Sulong Agency Agreement[19]:

(a) On 1 April 2014, without the knowledge or consent of P1 and/or P2, D2 caused P2 to sign a contract (the “Sulong Agency Agreement”) with a company known as 廣州素隆醫療科技有限公司 (“Sulong”);

(b) Under that agreement, Sulong was to promote and develop P2’s medical diagnostic services in the Mainland;

(c) Sulong’s service was to be charged on commission, calculated on the basis of the total income received by P2. 

(d) As P2 had not rendered any services since its incorporation, and thus did not have any income, no service charge should have been payable to Sulong;

(e) In breach of their fiduciary duties and/or equitable duties of fidelity owed to P2 and/or breach of trust, D2 and D3, together with Chen QJ, caused P2 to pay between October 2014 and March 2015 Sulong service charges in the total sum of RMB 488,000.  Those charges were paid without consideration;

(f) D2 and D3 are liable to account to P1 and P2 for that amount.

24.  The Secret Branch Office[20]

(a) D2 and D3, in breach of their fiduciary duties and in furtherance of Ds’ conspiracy to injure and defraud P1 and/or P2, secretly set up a branch office of P2 in Panyu, Guangdong (the “Secret Branch Office”);

(b) By reason of D2 and D3’s fiduciary duties, they are liable to pay over any profits or money they received to Ps. 

25.  The Conversion[21]:

(a) D2 has failed to return a computer and a printer provided for his use during his employment, thereby converting the same for his own use;

(b) In the course of her oral opening, Ms Siu informed this Court that this allegation of conversion would no longer be pursued.  I am no longer concerned with §§60-67 of the ASOC.

26.  The Misappropriation of Funds[22]:

(a) In breach of fiduciary duties and/or equitable duty of fidelity and/or in breach of trust, D2, with the assistance of Chen QJ, had misappropriated an aggregate sum of RMB 905,813 (being alleged reimbursements of expenses) and another sum of RMB 102,883 (being education fees);

(b) In the course of her oral opening, Ms Siu informed this Court that the part of this item in respect of the sum of RMB 513,600 particularized as Item 6 under §68, being part of the aggregate sum of RMB 905,813, would be abandoned.  The balance being claimed is now RMB 392,213.

27.  In summary, and according to the prayer[23], Ps’ claims are as follows:

(a) Against D1:

(i) Damages for breach of the Collaboration Agreement, Commission Agreement and 2014 Cooperation Agreement;

(ii) Damages for fraudulent misrepresentation, alternatively, damages for misrepresentation pursuant to Section 3 of the MO;

(iii) Costs and expenses wasted and incurred in hiring D1, establishing DCI, Baigao and P2 and in obtaining the necessary permits and licences;

(iv) A declaration that D1 is liable to account as a constructive trustee on the ground of knowing receipt of money paid in breach of D2’s and D3’s fiduciary duties in relation to the 2^nd or 3^rd LIS Contract;

(b) Against D2:

(i) Damages for fraudulent misrepresentation, alternatively, damages for misrepresentation pursuant to Section 3 of the MO;

(ii) Cost and expenses wasted and incurred in hiring D1, establishing DCI, Baigao and P2 and in obtaining the necessary permits and licences;

(iii) An order that P2 be indemnified for the sum of RMB 1,050,000 in relation to the 1^st LIS Contract;

(iv) An order to pay Ps the sum of HK$3,448,060.86 in relation to the 2^nd or 3^rd LIS Contract, and the sum of RMB 488,000 under the Sulong Agency Agreement;

(v) An order to pay Ps the sums in respect of the Misappropriation of Funds;

(vi) An account of all sums misappropriated; and

(vii) An account of money received as secret profit;

(c) Against D3:

(i) An order that P2 be indemnified for the sum of RMB 1,050,000 under the 1^st LIS Contract;

(ii) An order to pay Ps the sum of HK$3,448,060.86 in relation to the 2^nd or 3^rd LIS Contract, and the sum of RMB 488,000 under the Sulong Agency Agreement;

(iii) An account of all sums misappropriated; and

(iv) An account of money received as secret profit.

(d) Against all Ds:

(i) Damages for Conspiracy;

(ii) All other necessary accounts and enquiries;

(iii) Further and/or alternatively, a declaration that Ps are entitled to trace the secret profit into any traceable properties or proceeds of Ds.

C.2. Ds’ pleaded case

28.  Ds’ amended Defence (“ADef”) is dated 12 January 2017.

29.  Ds’ pleaded defence for the Stage I causes of action may be summarized as follows:

(a) Dr Tam was aware of D2’s experience;

(b) D2 does not admit having made the Representation; 

(c) In the course of discussion on possible cooperation, D2 “did suggest that it was possible that a WOFE may be set up in the PRC and that [D1] have experience in setting up WOFE in the PRC”[24]. D2 denies that he has ever told Dr Tam that he had all the experiences and connections to guarantee any outcome.  He denies that “[D2] made any representation of fact or law capable of inducing [Ps] to rely on such representation”[25];

(d) D2 understood in or around July 2012 that a foreign ICL could be set up in the Mainland in the form of WOFE[26]. He pleads a number of matters in support of his understanding;

(e) Inducement is denied[27];

(f) It is admitted that parties entered into the Collaboration Agreement and the Commission Agreement.  Inducement is denied[28];

(g) Falsity of the Representation is denied[29]. Ds aver that the Representation is inherently contradictory, in the sense that even on Ps’ case, a WOFE could still practise in the Industry of ICL though with certain restrictions.  Furthermore, pursuant to the Collaboration Agreement, Ds had obtained a number of city level government approvals for and on behalf of DCI.  It was only due to the inability on the part of P1 to prove that DCI or P1 was registered as a medical establishment in Hong Kong that provincial level approval could not be obtained.  It was then agreed by P1 and Ds that the CEPA route would be followed;

(h) There were no restrictions against establishing a private ICL by a WOFE between 2012 to 2014[30];

(i) The CEPA route was not an effort to mitigate loss;

(j) Ds deny any breach of agreements[31]. They deny that there were any terms in the Collaboration Agreement or Commission Agreement that could be construed as Ds having guaranteed that all permits/licences for DCI would be granted.  Ds did use their best endeavor to obtain the necessary licences.  Any delay or failure to obtain such was the fault of P1.  P1 also frustrated negotiations with potential investors which D1 had introduced.

(k) Ds deny the existence of any undertaking by Ds to obtain the necessary approvals and licences.  They aver also that the relationship between Ps and Ds were only contractual, but not fiduciary[32].

30.  Ds’ pleaded defence for the Stage II causes of action may be summarized as follows:

(a) Any fiduciary duties which D2 and D3 had were owed to P2 but not P1;

(b) The conspiracy is denied;

(c) All LIS Contracts where authorized and approved[33];

(d) In respect of the Sulong Agency Agreement[34], P2 did engage Sulong as its agent.  Ps consented to that.  In any event, prior approval from Ps was not needed before P2 entered into any business dealings in the normal course of business.  Sulong did render valuable services to P2 by promoting and circulating P2’s business and services to local hospitals and potential clients.  Payments to Sulong were for the genuine purpose of developing P2’s business;

(e) In respect of the Secret Branch Office[35], D3 admits having set up the branch office concerned for P2.  Ds aver that it was set up to facilitate relationships with various hospitals, which are P2’s potential clients.  It is denied that D3 breached any fiduciary duties or caused any loss to P2;

(f) The Conversion is not admitted and Ps are put to strict proof thereof;

(g) In respect of the Misappropriation of Funds[36], Ds say that the expenses incurred were either necessary expenses pursuant to D2’s duty as a director or benefits that he was entitled to under his employment contract with P2.

D. The Agreed Issues to be Tried

31.  The agreed issues for trial can be broadly summarized as follows:

(a) Whether D1 and/or D2 are liable for misrepresentation:

(i) whether D1 and/or D2 made the Representation;

(ii) if so, whether the Representation false;

(iii) if so whether the Representation was made fraudulent or recklessly;

(iv) whether D1/D2 intended to act in reliance of the same;

(v) alternatively, whether the Representation was made negligently;

(vi) whether P1 was induced by and relied on the same in entering into the Collaboration Agreement and Commission Agreement;

(vii) whether P1 has suffered any loss and damage;

(b) Whether D1 is liable for breach of contract:

(i) whether D1 in breach of the Collaboration Agreement and the Commission Agreement failed to obtain the necessary permits/licences for DCI to set up a private ICL in Guangzhou as WOFE;

(ii) whether D1 failed to introduce any fund investment into DCI, or P1/P2 was in breach of the Collaboration Agreement and the 2014 Cooperation Agreement;

(iii) if D1 was in breach, whether P1 has suffered any loss and damage;

(c) Whether Ds are liable for breach of any fiduciary duties to P1:

(i) whether Ds owed any fiduciary duties to P1;

(ii) if so, whether Ds were in breach for failing to obtain the necessary permits/licences for DCI to set up a private ICL in Guangzhou as WOFE from the Ministry of Health;

(iii) if so, whether P1 has suffered any loss and damage;

(d) Whether D2 and D3 are liable for breach of fiduciary duties to P1 and/or P2 and whether Ds are liable for conspiracy to defraud:

(i) whether D2 and D3 owed P1 and/or P2 any fiduciary duties;

(ii) whether D1s engaged in the following unauthorized and unlawful acts in breach of D2 and D3’s fiduciary duties to P1 and/or P2:

(1) causing P2 to enter into the 1^st LIS Contract at a contract sum not authorized by P2’s board;

(2) causing P2 to enter into the 2^nd and 3^rd LIS Contracts;

(3) causing P2 to make payment to Sulong;

(4) secretly setting up a branch office of P2 in Panyu, Guangzhou;

(5) misappropriating funds from P2 in favour of D2.

E. The witnesses

32.  Ps have called 5 witnesses. 

(a) Dr Tam:

(i) Dr Tam was the founder, Chief Executive Officer and a director of P1.  He is the main witness for Ps;

(ii) Dr Tam has given 2 witness statements of 2 September 2016 and 4 May 2017 (“Tam/WS1” and “Tam/WS2”);

(b) Mr Wong Shun Yun (“Wong”):

(i) He was one of P1’s directors until early 2013.  Thereafter he attended board meetings of P1 as an observer.  He was appointed as one of the directors of P2;

(ii) He has given 2 witness statements of 2 September 2016 and 2 May 2017 (“Wong/WS1” and “Wong/WS2”);

(c) Mr Au Matthew Kam-Kuen (“Au”):

(i) Au was the Chief Financial Officer (“CFO”) of P1 between 2 May 2014 and 30 June 2015.  He was responsible for the overall finance planning and control operation of P1;

(ii) He has given 1 witness statement of 2 September 2016 (“Au/WS”);

(d) Mr Joseph Chow Kwok Fai (“Chow”):

(i) Chow was the General Manager of P1 until about April 2016.  His job as such was to oversee the operation of P1 and to report matters to the board of P1 for their decision making;

(ii) He has given 1 witness statement of 2 September 2016 (“Chow/WS”); and

(e) Dr Guo Xiumei (“Guo”):

(i) Guo joined P1 in 2011.  She was a Scientist and Lab Manager China of P1.  Between the incorporation of P2 and about April 2015, she was the Technical Director of P2.  Upon D2 and D3 being removed from their offices, she was appointed Deputy General Manager and the Legal Representative of P2;

(ii) She has given 1 witness statement of 2 September 2016 (“Guo/WS”).

33.  Ds have called 3 witnesses:

(a) D2, who has given 2 witness statements of 29 August 2016 and 3 May 2017 (“D2/WS1” and “D2/WS2”);

(b) D3, who has given 1 witness statement of 29 August 2016 (“D3/WS”); and

(c) Chen QJ:

(i) She was the Finance Director of P2 between November 2013 and April 2015.  She was involved in the administration and planning of P2’s finance. She sat in board meetings and record the minutes.  She reported to the board of P2, and more directly to Wong, Mr Desmond Hau (“Hau”) and Au.  Hau was a director of P2;

(ii) She has given 1 witness statement of 29 August 2016 (“Chen QJ/WS”).

34.  All the witnesses have adopted their witness statements as their evidence-in-chief.

E.1. Credibility

35.  I remind myself when considering a witness’ credibility the importance of considering the inherent likelihood or unlikelihood of the witness’ evidence, the consistency of the witness’ evidence with undisputed or indisputable evidence, with contemporaneous conduct and documents, and the internal consistency of the witness’ evidence.  I need to consider the totality of the evidence.  I warn myself against attaching undue weight on demeanour, though demeanour is obviously relevant when considering credibility.

E.2. The witnesses called by Ps

36.  Ps have called Dr Tam, Wong, Guo, Chow and Au.  I do not find any major aspects of their evidence inherent improbable.  Save those discussed below, I detect no major inconsistencies, whether internal or external, amongst their evidence.  I find them in general to be honest witnesses.

37.  Whilst in general I find them to be honest witnesses, I do not find their evidence on all issues to be necessarily reliable.  As the discussions in the balance of this Judgment show, on certain occasions, whilst they have said in their witness statements for examples that certain matters had or had not taken place, or that they did not have knowledge of certain matters, it turned out that they actually could not recall details of the relevant events, or that there actually existed documents (budgets and emails for instance) which could have affixed them with knowledge on matters which they claimed they did not have.  Another problem is that they were not involved in the daily operation of P2, so that in respect of certain issues relevant to P2’s finances and operation, they actually had no contemporaneous knowledge of.  On those issues, they are not in the position to contradict the versions of events given by D2, D3 and Chen QJ. 

38.  Hence, I do not find it justified to make a sweeping finding that all the evidence given by the witnesses called by Ps should be accepted.  Their evidence has to be considered on an issue by issue basis, which I will do below.

E.3. D2

39.  I find that D2’s evidence suffers from a number of major problems.  I will set them out below.  For those reasons, I do not find D2 to be in general an honest and reliable witness. 

40.  However, I again do not find it justified to make a sweeping finding that all the evidence given by D2 should be rejected.  Some of the evidence he gave was consistent with contemporaneous documents, and is not contradicted by any evidence called by Ps.  In respect of those aspects of his evidence, I have to when necessary consider them individually on an issue by issue basis so as to decide whether they should be accepted.

41.  I now state my reason why I find D2 to be in general not an honest and reliable witness.

42.  D2 has given inconsistent evidence as to whether he has mentioned to Dr Tam D3’s father:

(a) D2 was inconsistent and self-conflicting as to whether he had mentioned D3’s father to Dr Tam;

(b) One limb of Ps’ pleaded case is that D2 told Dr Tam that D1 had all the necessary resources to obtain approval for forming a WOFE to provide diagnostic laboratory services in the Mainland, and that D2 himself had all the experiences and connections to succeed;

(c) In Ps’ Amended Reply of 9 February 2017 (“AReply”), Ps plead[37] specifically that:

“ [D2] told [Dr Tam] that [Ds] had the necessary experience and resources, in particular, [D3’s] father was the head of Guangdong Food and Drug Administration and [Ds] knew well a Mr. Ren Dequan who was also a head of the relevant governmental authority.”

(d) In Tam/WS1, at §13(4), Dr Tam testifies to that same effect;

(e) In D2/WS2, at §2, with specific reference to §13(4) of Tam/WS1, D2 says that:

“… I never mentioned about [D3’s] father.”

However, when cross-examined by Ms Siu, and having been referred to §5 of a script (attached to an email of 17 September 2012) as to what D2 intended to discuss with Dr Tam during a meeting about to take place on 21 September 2012, D2 accepted that the abovementioned contents of §2 of D2/WS2 is not correct.  §(5) of that script[38] reads:

“ assure Dr Tam that [D1] has the unmatchable resources in China in the healthcare area including Chris and Rebecca’s corporate experience from pharma MNCs; tell them to stop listening to non-pro people and should understand the rich resources of Mr Ren at the national level and Mr Liang (Rebecca’s father) at Guangzhou”.

“Rebecca” is D3.

43.  D2 was evasive when being asked whether he had read certain documents relating to CEPA:

(a) D2 was cross-examined in relation to “Supplement IX to the CEPA”[39] (“Supplement IX”).  He accepted that that document had become available in October 2012 before the parties signed the Collaboration and Commission Agreements on 8 November 2012.  He was asked as to whether he had explained the contents of Supplement IX to Dr Tam;

(b) That line of questions is relevant to the Misrepresentation Claim;

(c) D2 was evasive when answering that line of questions, and has given inconsistent answers:

「 問： 就話 ‘from 1^st January 2013, the Mainland shall further relax the market access conditions’，你有冇睇過呢份文件㗎？

答： 呢份文件我知道有，CEPA，呢份文件本身我冇喇，呢份文件我冇睇晒。

問： 喺2012年11月簽約之前，你有冇睇過呢份文件先？

答： 我知道有CEPA出呢樣嘢，我冇睇過個文件，...

問： 咁...

答： ...但係我哋嗰個...

官： 你冇睇過定係冇睇晒？

答： 我冇睇晒，我冇睇晒，我凈係...

官： 你第一次講冇睇晒，第二--你即係可能係講得唔清楚嘅啫，第一次講冇睇晒，跟住冇睇過，跟住就我再問就冇睇晒。

答： 我冇睇晒，我知道有呢份文件。

官： 冇睇晒。

答： 冇睇晒。

官： 有睇過。

答： 有睇過，唔。

…

問： 呢一份文件--呢份文件係12年10月已經有㗎喇，你同唔同意呢個講法先？

答： 同意。

問： 好，呢份文件就早過你哋11月8號簽嗰啲合約就出現㗎喇，係咪？

答： 係。

問： 你係咪喺簽約之前已經睇過㗎喇？

答： 我知道有呢份文件。

問： 咁睇過未？

答： 我知道佢出，我冇去詳細睇過份文件。

問： 冇睇過定冇詳細睇過？

答： 冇詳細睇過。

問： 即係有睇過，係咪？

答： 係，冇錯。

問： 咁頭先同你睇409至410頁，有關medical institution嗰部分，你有冇睇過？

答： 我同意裡面嘅內容。

問： 唔係，有冇睇過？簽約之前，我問你。

答： 我唔記得我睇邊部分喇，即係凈係我擸過下有呢份文件。」

44.  Inherent improbability of there being no written record of Ps having been required to prove that DCI or P1 had been registered as a medical establishment in Hong Kong:

(a) It is a plank of Ds’ defence that pursuant to the Collaboration Agreement, Ds had obtained a number of city level government approvals for and on behalf of DCI, that it was only due to the inability on the part of P1 to prove that DCI or P1 was registered as a medical establishment in Hong Kong that provincial level approval could not be obtained, and that it was only then when P1 and Ds agreed that the CEPA route would be followed;

(b) Those are important matters.  They changed the course of the application.  I find it inherently most improbable that there was no email or document which recorded or mentioned those events.  I find D2’s evidence that the matters were in his view not important incredible, and was given in an attempt to explain the absence of records.   D2’s evidence on cross-examination was as follows:

「 問： 呢一個嘅所謂冇certification，或者冇對等嘅registered medical institution嘅證明，我向你指出，從來冇喺任何電郵出現過嘅，係咪。

答： 我有口頭同佢講。

問： 呢件事重唔重要呀，你認為？

答： 唔係好重要。

問： 你認為一個行緊你哋一路用DCI去做一個外商獨資嘅診斷...

答： 我頭先未答完，唔重要，因為點解呢？衛生廳喺睇嗰個巿批文報上嚟嘅時候，佢就要求我去做一樣嘢之嘛，『你去問番達雅高補番一個就係叫做醫療機構執業許可證』，咁我問Dr Tam嘅時候，嗰陣話冇呀，咁，於是話『我又去想辦法喇』咁，於是我真係跑番去同衛生廳傾，衛生廳話，『咁樣樣，都係好鼓勵你哋外商獨資做，就都係希望DCI做，你不如去申請一個叫CEPA嘅--喺CEPA嘅醫療機構嘅一個status』，咁於是我又去問Dr Tam，同Dr Tam講，Dr Tam話佢哋要--即係幫我哋，但係都要--佢話『我哋做一啲咁嘅嘢喎』，咁我哋研究咗，又攞唔到，點解呢？因為如果嗰個Diagcor唔係醫療機構，喺國內嘅definition，咁佢變咗CEPA嘅醫療機構都攞唔到，於是乎我又返番去衛生廳，又解畀佢聽，咁你個源頭要求樣樣嘢都做唔到㗎喎，最後屘衛生廳真係好幫忙就係點呢？降低咗個標準話『得，我畀一個方法你，你去攞DCI嘅叫做CEPA嘅服務，健康服務』，咁我又話畀Dr Tam聽，Dr Tam話『好，好，我哋即刻去攞』，咁就係--但係返嚟，又攞唔到嘅原因就係話，DCI係一個新公司，就攞唔到，咁於是乎我又返去話畀衛生廳聽，衛生廳就話，『得喇，因為我原先都係想問你嘅parent company之嘛，因為點解呢？所有嗰啲技術都係佢攞㗎嘛，你最後一個方法，你去叫Diagcor就攞一個CEPA嘅健康服務』，咁就攞到之後就批准咗喇，我想提出一樣嘢，如果今日從頭開始係用CEPA呢個方法，達雅高係攞唔到，我哋想獨資，喺當時，點解呢？因為對等嘅原則，等於律師要喺香港，如果要喺國內申請要用CEPA嘅話，香港一定係一個律師牌，所以同樣咁嘅理解之下，如果係真係乜都唔講頭先嗰啲嘅批准，外商冇嗰個投資目錄嘅話，CEPA醫療機構係走唔通，而家仲最屘我哋有CEPA嘅健康服務，咁就講來講去，衛生廳從來問嘅嘢冇離開過投資目錄，佢哋都係想批准，不過幫我哋，因為中國第一間，佢哋好相信達雅高真係帶到好多技術去中國做好呢件事，所以好幫我哋做嘅，...

問： 呢度...

答： ...咁個過程就係咁樣樣嘅啫。

問： 你頭先所講，同呢一個所謂廣東省衛生廳，係咪？

答： 係。

問： 嘅溝通，來來回回頭先你提及三次喇，起碼。

答： 係。

問： 有冇任何書面紀錄？

答： 冇。

問： 全部都係口頭㗎？

…

答： 我喺口頭，因為當時事情好急，要做嘢，我喺電話，每日同佢通電話，都會有每日同佢匯報個情況。

…

問： 你亦都從來冇向Dr Tam或者達雅高解釋過你，或者提及過你頭先所講，來來回回同呢位省衛生廳張署長嘅討論以及對方嘅建議，冇提過嘅，口頭、書面都冇。

答： 我有提過，我有--口頭有提過，頭先我講…」

45.  D2 has in respect of the LIS Contracts given extensive evidence that is not contained in witness statements:

(a) Both D2 and D3 has given extensive oral evidence in relation to the LIS Contracts that is not in their respective witness statements;

(b) At §48 of D2/WS1[40], D2 says, in relation to the LIS Contracts that:

“ …Since the allegation is raised against [D3], I’ll leave [D3] to deal with the allegations in her witness statement.”

(c) At §7 of D3/WS, D3 says that:

“ I will leave [D2] to make detailed accounts as to what happened with the LIS System. I can, however, confirm that [Ps] were both kept informed and consulted about the progress of the LIS system. We never had any objections or dissatisfaction coming from [Ps] in that regard.”

(d) The end result is that neither D2 nor D3 deals with the LIS Contracts in their witness statements;

(e) In the course of cross-examination, D2 and D3 suddenly volunteered detailed evidence in relation to the LIS Contracts.  The effects of their evidence was that the quote from中軟for the development of LIS was expensive.  Wu Fan of中軟in his personal capacity was however willing to provide the same service at a much lower price.  The Board of P2 approved it in order to save costs.  But Wu Fan in his personal capacity could not issue any invoice for the contract price.  To facilitate that arrangement, a so-called back-to-back arrangement was entered into.  In effect D3 caused P2 to enter into the 2^nd LIS Contract (subsequently superseded by the 3^rd LIS Contract) with D1 so that the relevant contract sum could be paid by P2 to D1, so that D1 could in turn arrange cash be paid to Wu Fan in Hong Kong.  Tax could also be reduced;

(f) I will call the above for ease of reference the “Alleged Back-to-Back LIS Arrangements”;

(g) None of the above has been pleaded.  Nor do they appear in any witness statements of D2 or D3;

(h) D3 tried to explain in evidence that given the sensitive nature of the scheme which related to tax, she did not explain it either in the ADef or in her witness statement;

(i) It is not for a witness to decide what evidence to give.  Nor is it for a witness to ambush the other side by revealing matter for the first time when giving evidence in court.  The adoption of such attitude, and their preparedness to withhold evidence to suit their purposes severely affects the reliability of D2 and D3 as witnesses.

46.  In respect of the LIS Contracts, I also note that in the ADef, Ds claimed that both the budget subscribed for the purchase of LIS and the 2^nd and 3^rd LIS Contracts had been approved by inter alios Au. That could not have been the case as Au only joined P1 as CFO on 2 May 2014, and was not appointed a director of P2 till July 2014.  It was only during cross-examination when D2 claimed that he had made a mistake in the ADef, and that the reference to Au should have been a Mr Hau.  This also adversely affects D2’s credibility.

47.  D2 has in relation to the Sulong Agency Agreement also given extensive evidence that is not in his witness statements:

(a) Again, in respect of the Sulong Agency Agreement, D2 has given extensive oral evidence which is not in his witness statements;

(b) In D2/WS1[41], D2 says that P2 needed a marketing team, that after consulting the board, P2 engaged Sulong as an agent to recruit customers and develop the new market, and that:

“ 51. Sulong did provide [P2] with valuable services. It was a company established in 2007 and it had expert knowledge on how to conduct sales and promotion services. Sulong has a sales team of about 20 persons, and it has a logistic team which helped [P2] collect diagnostic samples from clients. At that time, [P2] did not have any logistic staffs or transportation to do the same.

52. Besides, I did consider that Sulong as a valuable and competent firm to engage because its general manager, Dr Yi Xi, was highly qualified and allowed [P2] to use her professional qualification to fulfil the statutory quota of professionals.  As far as I am concerned, Sulong was a worthy investment for [P2].” 

(c) Under cross-examination, D2 claimed that Sulong had incurred expenses for P2 for which Sulong should be reimbursed, that Sulong had collected valuable marketing intelligence from hospitals for P2, and that D2 had since April 2014 had on average weekly meetings with Sulong to receive the intelligence. However, none of those matters have been mentioned in his witness statements. Nor is there any written record about those alleged weekly meetings.  D2’s relevant oral evidence is as follows:

「 問： 呢$488,000，其實就係用嚟繳付番素隆幫百皋墊支咗出嚟嘅費用，係咪？

答： 有一部分就係嗰個marketing intelligence，咁呢啲就其實就係，佢要去醫院搜集嘅時候，即係我覺得有少少當係一個顧問費喇。

問： 咁就包括墊支嘅部分就係頭先你講喇，請醫生，買lunch喇，買snack，交通費喇，係咪？

答： 係。

問： 另外就包括所謂intelligence，即係調查嘅費用，係咪？

答： 係，調查費用嗰度會比較大啲喇。

問： 呢一系列你所講嘅嘢，有冇喺任何文件出現過？

答： 冇，但係...

問： 咁即係素隆口講㗎咋喎，佢同你講，『我買咗lunch，我調查咗，我買咗snacks，我租過場，你畀番錢我』，係咪咁嘅意思？

答： 我唔知道財務有冇去同佢哋對數喇。

…

問： 好，頭先你所講intelligence，即係話素隆幫你哋調查醫院嘅一啲事情，係咪？

答： 係。

問： 有冇需要寫番畀你哋佢調查咗咩嘢㗎？

答： 我知道個結果嘅。

問： 口講畀你聽？

答： 同我哋開會，話畀我哋聽囉。

問： 即係口講？有冇會議紀錄㗎？

答： 冇。我哋每日喺外面做生意，就都好辛苦嘅，希望妳理解，唔係每一樣嘢都要好似我哋喺寫字樓裡面，啲嘢都要即係有--即係會議記要嘅。

…

問： 無論係咪你單獨開都好喇，我頭先講嘅嗰句說話啱唔啱先？由2014年4月至到2015年3月，接近一年嘅時間，你每個禮拜都有同素隆開會嘅，係咪...

答： 平均，平均，因為我哋習慣上就係，即係有個週會嘅。

問： 而呢個一年之內，每個禮拜，平均每個禮拜都會開嘅會，喺百皋嘅任何文件上面都冇紀錄，你係咪咁嘅意思？

答： 呢啲開會唔需要紀錄。

問： 即係冇喇，係咪？

答： 冇。」

E.4. D3

48.  For the following reasons, I find that D3 is in general not a reliable witness.  However, similar to the case of D2, there are aspects of her evidence which, if un-contradicted, are capable of being accepted.  Again, in respect of those aspects of her evidence, I will have to when necessary consider them individually on an issue by issue basis so as to decide whether they should be accepted.

49.  I now state the reasons why I find that D3 to be in general not a reliable witness.

50.  I have dealt with D3’s evidence in relation to the LIS Contracts, which I repeat.  Those matters reflect badly on the reliability of D3 as a witness.

51.  Unsatisfactory answering of Interrogatory:

(a) In D3/WS, D3 says that as P2 did not have a marketing or logistic team, the Board of P2 resolved to assign the marketing work to Sulong.  She does not mention any position which she had held with Sulong;

(b) On 15 December 2016, interrogatories were administered upon inter alios D3.  She was asked to state “what is the relationship between Sulong and [D3]”[42];

(c) On 12 January 2017, D3 filed an affirmation to answer the interrogatory.  She said on oath that[43]:

“ At the material time of the dispute as pleaded in the [ASOC], there is no relationship between Sulong and [D3] beyond that already pleaded at paragraph 56 of the [ADef]”;

(d) §56 of the ADef does not mention any position which she had held with Sulong;

(e) However during cross-examination, D3 accepted that:

(i) she had between 2013 and 2016 been the “監事” of Sulong.  Her name was mentioned as such in a company registration document of Sulong[44];

(ii) The nature of her duties as such was, according to D3:

「 係，即係會畀一啲意見呀，或者係譬如佢有啲嘢做得唔係咁啱呀，我哋可以提出嚟。

      我亦都講過，素隆嘅監事係一個獨立嘅第三方嘅一個身分，並唔代表任何利益囉。咁我亦都想再強調，我唔係素隆嘅股東，唔係素隆嘅董事，亦都唔係素隆嘅僱員，亦都冇攞素隆嘅任何嘅利益，亦都冇攞薪酬，亦都包括冇攞薪酬等等。咁只不過係作為一個第三方嘅一個嘅獨立嘅人士，參與咗佢公司嘅--做一個監事。」

(iii) Despite those alleged natures, it remains the case that D3 had, in her own words, “參與咗佢公司嘅做一個監事”.  She did not reveal that upon being interrogated about her relationship with Sulong.  That in my view is highly unsatisfactory, and adversely affects D3’s credibility as a witness.

52.  Inconsistent evidence in respect of the Sulong Agnecy Agreement:

(a) D3 said upon cross-examination that Sulong had conducted market researches (「市場調研」) for P2.  But when pressed as to whether Sulong had provided written reports on such researches, D3’s evidence has been inconsistent.  At one stage she said there was PowerPoint presentation, then said that there was written reports, then said that she had seen one or two, then claimed that there was one thick one of some 300 pages, but then later claimed that she did not know whether it was in writing;

(b) In any event, none of those documents have been produced, and none mentioned in her witness statement;

(c) Such inconsistencies again adversely affect D3’s reliability and credibility as a witness.

E.5. Chen QJ

53.  Certain aspects of the evidence given by Chen QJ is supported by documents and have a clear ring of truth in them.  There are however, certain other aspects of her evidence which have not been previously mentioned in her witness statement.  Whilst I am of the view she is in general not a dishonest witness, I will have to consider her evidence when necessarily on an issue by issue basis.

F. The Misrepresentation Claim

54.  I now proceed to consider each of Ps’ claims in turn.  I start with the Misrepresentation Claim.

F.1. P1’s Misrepresentation Claim as pleaded reiterated

55.  It is useful to reiterate what P1’s pleaded case is in this regard.  The pleaded Representation which forms the basis of the Misrepresentation Claim is specific.  It is defined at §12(1) of the ASOC as being this:

“ a [WOFE] can be set up by a new offshore company to provide medical diagnostic laboratory services in the PRC.”

It is P1’s pleaded case that it is this Representation which it has acted in reliance upon[45], this Representation which was false[46] (in that “a WOFE could not practice in the industry of ICL”), and that it was “by reason of the Representation” that it has suffered loss[47].

56.  On the face of pleadings, it has been pleaded that D2 had also made representations on his and D1’s experience and alleged resourcefulness (which Mr Chan in his written closing refers to as the “Experience Representations”, which term I adopt).  The Experience Representations have also been canvassed in evidence.  But they are not the representations which form the basis of the Misrepresentation Claim.  There are no pleaded facts suggesting that they were false.  In any event, Dr Tam has in the course of cross-examination accepted that they were not false.  The relevance of the Experience Representations is therefore confined to being part of the factual background against which the Representation and the Misrepresentation Claim have to be considered.  

F.2. The legal bases of the Misrepresentation Claim

57.  Ms Siu has both in the course of her opening and her closing confirmed that the Misrepresentation Claim is tortious in nature.  As summarized by her[48], under this head, P1 claims damages against D1 and/or D2 for fraudulent or negligent misrepresentation, or damages under section 3 of the MO.

58.  In so far as fraudulent misrepresentation is concerned, Ms Siu, relying on Clerk and Lindsell on Torts, 22^nd ed, §§18-05, 18-19, 18-30, 18-34 and 18-39, summarized the elements as follows:

(a) the defendant has made a false representation;

(b) knowing it to be untrue, or having no belief in its truth, or being reckless, careless as to its truth;

(c) the defendant has intended to induce the plaintiff to act in reliance on such a representation;

(d) the plaintiff did in fact rely on the representation; and

(e) the plaintiff has been caused loss and damage in reliance on the false statement.

59.  In so far as negligent misrepresentation is concerned, Ms Siu relies on Hedley Bryne & Co Ltd v Heller & Partners Ltd [1964] AC 465, 486, 502 and 514.

60.  In respect of innocent misrepresentation, Ms Siu relies on section 3(1) of the MO.

F.3. Factual findings

61.  I accept Dr Tam’s evidence in this regard and find that:

(a) D2 was one of the students in the Department of Biochemistry at HKU in the 1980s when Dr Tam first came to know him;

(b) In about 2006, Dr Tam founded P1 in Hong Kong;

(c) P1 has been carrying on business of research and development of bio-medical diagnostic products and providing molecular diagnostic laboratory services;

(d) Soon after its establishment, P1 became a global leader in flow-through hybridization technology (an innovation that rapidly detects the presence of target RNA or DNA molecules).  It offers a range of products, solutions and services related to RNA and DNA analysis[49];

(e) In about November 2011 at the HKU Centennial Dinner, Dr Tam met D2 again.  Dr Tam told D2 about the Plan of extending P1’s service and products to the Mainland;

(f) D2 expressed interest in the idea;

(g) From late 2011 to November 2012, D2 and Dr Tam discussed about duplicating P1’s lab service to the Mainland by setting up an ICL in the form of WOFE;

(h) In about December 2011, upon Dr Tam’s invitation, D2 visited P1’s facilities in Hong Kong;

(i) At that visit, Dr Tam told D2 various things, including the following[50]:

“ (2) [P1] was considering to replicate the Hong Kong laboratory in the PRC to provide the same standard testing service. That is to say, to establish an independent clinical laboratory in the PRC which is supported by [P1’s] proven operation system and technologies developed by [P1’s] Research & Development team.

(3) To achieve such goal and in order to make sure the service standard in the PRC is the same as that provided in Hong Kong, it is hoped that the PRC duplicate will be an ICL and a [WOFE].

(4) It is anticipated that relevant licences and approvals have to be obtained from the PRC government, but the shareholders and management of [P1] do not have any working knowledge in the establishment of such ICL in the PRC and therefore were not sure about the feasibility of the Plan.”

(j) During the course of subsequent discussions, D2 repeatedly made the Experience Representations to him[51], which included D2’s experience in the relevant field, that he was the President of D1, and D3 was a director of D1, that her father was the former head of Guangdong Food and Drug Administration;

(k) In the course of those discussions, D2 also sent to Dr Tam a number of emails and documents, which included[52]:

(i) The draft collaboration agreement sent by D2 to Dr Tam via email of 23 July 2012[53], which suggested that the corporate structure to be adopted was to incorporate DCI in Hong Kong which would in turn invest and hold an ICL in the Mainland — see in particular Clause 5 thereof, that:

「 [P1]和[D1] 將在香港成立[DCI]。[P1]將投入現金和技術，成為[DCI] 的最大股東。[D1]將投入無形資產，包括在中國大陸取得外資獨立醫學檢驗中心牌照 … 」[54]

(ii) D2’s email dated 31 July 2012 to Dr Tam wherein he said that “… The laboratory license that [D1] has committed to secure for GD DiagCor…”[55], suggesting that DCI can establish a WOFE in Guangzhou to provide diagnostic laboratory services;

(iii) D2’s email of 28 August 2012 to Dr Tam[56] wherein D2 said

“ As discussed on the phone, attached please find a ppt document stating the China Plan and its execution detail for the establishment of a successful DNA testing venture in China.

[D1] is prepared to bring to the collaboration its China government resources and an affiliated investor group to [DCI] for building a successful DNA diagnostic company in China which will be listed in an overseas stock exchange within 3 years”;

(iv) That “China Plan” attached to the email of 28 August 2012[57] illustrated the plan to set up WOFE through DCI to provide ICL services:

「 * 在海外注册成立 [DCI]，注入資金、技術、專利、管理技術等并投資和控股在中國大陸設立的獨立醫學檢驗中心。

  *   第一步運用DCI股東 [D1] 在中國大陸的政府資源，首先在廣州和上海取得獨立醫學檢驗中心的牌照，并完善後續手續。然後 [P1] 派出技術團隊建設檢驗中心。」

62.  P1 and D1 entered into the Collaboration Agreement on 8 November 2012.  P1, DCI and D1 entered into the Commission Agreement on the same day. The Commission Agreement was in fact Annexure 4 of the Collaboration Agreement.

63.  I accept Dr Tam’s evidence that P1 relied on and was induced by the Representation in entering into the Collaboration Agreement and Commission Agreement.

64.  Pursuant to those agreements, DCI and Baigao were subsequently incorporated. 

65.  Through Ds’ efforts, DCI obtained the following approvals from the city and district level authorities:

(a) “企業名稱預先核准通知書” from廣州市工商行政管理局dated 6 December 2012[58];

(b) “關於 [Baigao] 設置申請的初審意見的函” dated 15 March 2013 issued by蘿崗區衛生局[59], wherein it was said inter alia that:

「…擬初步同意你公司的設置申請。」

and

(c) “廣州市衛生局關於設置 [Baigao] 意見的函” dated 10 July 2013 issued by廣州市衛生局[60], wherein it was said inter alia that:

「 …初審同意設置[Baigao]。根據…(粵衛[2010]3號)要求，請徑向省衛生廳提出設置申請。」

66.  On 10 May 2013, D2 sent to Dr Tam two emails dated 10 May 2013[61]. Therein, D2 said, inter alia:

(a) in the first email dated 10 May 2013, that:

“ The GZ Health Bureau has signed off on our application as of yesterday. They are waiting for our submission of the lease dated May 10 (today)As it is a WOFE, GZ Health Bureau has to file the case with the Guangdong Health Ministry (省衛生廳) which will organise the panel site visit — this is a new regulation.

We have been requested to arrange for [DCI] to apply for the CEPA status … We were explained that ICL is a service industry and [DCI] has to get the CEPA status in order to get a WOFE legal status in a service industry. Otherwise the business licence could not be granted.”[62]

(b) in the second email dated 10 May 2013, that:

“ The lease has been approved. Please see my email on getting several documents so that it could be signed. The same lease will be submitted to the GZ Health Bureau today. As of yesterday, GZ Health Bureau has approved our application but they have been told to file with the Provincial Health Ministry as our ICL is a WOFE. In fact, Provincial Health Ministry has taken over the panel site inspection which is a new regulation (but it is nothing to do with WOFE or not).

The CEPA regulation is a latest request by local Administration of Industry and Commerce … They came to a conclusion that [DCI] must get the CEPA status for a WOFE in service industry. We need to compile [sic. comply] otherwise the business license will not be granted.”[63]

67.  I do not accept D2’s evidence that P1 was required to prove that DCI or P1 was registered as a medical establishment in Hong Kong, or that it was because of Ps’ failure to do so that provincial level approval could not be obtained.  I have made the observation that it is inherently improbable, if that were true, that there was no record in that regard.

68.  No licence has been obtained for Baigao as a WOFE to operate an ICL. That was because DCI did not qualify for CEPA status.  In mitigation of its loss, Ps went for the CEPA route.

69.  Pursuant to the Commission Agreement, P1 had between November 2012 and September 2013 paid D1 sums in the total amount of RMB 2,250,000[64].

F.4. Whether D2 made the Representation

70.  I have considered the facts above which I have found. I have in particular considered the emails and documents highlighted above at §61(k).  I find that D2 did make the Representation.

71.  In so far as it may be argued that the Representation is a statement of opinion, I accept Ms Siu’s submission[65], relying on Smith v Land & House Property Corporation (1884) 28 Ch D 7 at 15 as explained by Lord Evershed MR in Brown v Raphael [1958] Ch 636 at 642, that the Representation impliedly states that D1 and D2 know facts which justify the opinion.

F.5. Whether the Representation False

72.  This is the main point taken by Mr Chan.  He summarises Ds’ case in respect of Ps’ Misrepresentation case[66] as follows, that “the misrepresentation claim is bound to fail as Ps have failed to prove that the [Representation] was false”. He develops that submission in detail at section F4 of his written closing.

73.  Ps aver that the Representation “was false in that a WOFE could not practice in the industry of ICL”.  I have set out above the particulars pleaded by Ps in support of that averment.

74.  Whether “a WOFE could not practice in the industry of ICL” depends on the prevailing law and regulatory regime at the material time.

75.  No expert opinion in that regard has been adduced.

76.  In submitting that the Representation was false, Ms Siu relies on a number of documents[67]. The first 2 of those documents are the 2 emails dated 10 May 2013 from D2 to Dr Tam which I have mentioned above. 

77.  The effects of what D2 said in those emails are far from clear.  He did not say “a WOFE could not practice in the industry of ICL”.  The application by Baigao as a WOFE for a licence to operate ICL being unsuccessful (as ICL was required to have CEPA status but could not due to its recent incorporation) is itself not proof that “a WOFE could not practice in the industry of ICL”.  It is also important to note that in any event, D2 was there only reciting certain explanations, requests and conclusions given or made by a bureau or certain bureaux.  Their correctness need to be proved.  The authority of the bureau or bureaux has not been explained.  The legal bases of those explanations, requests and conclusions have not been clarified.  When those legal bases, whatever they were, first become effective, was similarly not clear.

78.  In my view, the contents of those 2 emails are not sufficient to prove the falsity of the Representation.

79.  Ms Siu next relies on a document entitled “外商投資產業指導目錄2011修訂” (the “2011 Index”).  She submits[68] that:

“ However, it was not a ‘new regulation’ or ‘latest request’ as alleged by D2 in the emails. In the ‘外商投資產業指導目錄2011修訂’ implemented on 30th January 2012[69] …, the diagnostic DNA technology was on the ‘Prohibited List’ meaning a foreign enterprise was prohibited to invest in this business[70].”

80.  Ms Siu is there referring to Item七(1) (“Item七(1)”) of the part of the 2011 Index under the heading “禁止外商投資產業目錄”, which refers to “人體幹細胞, 基因診斷和治療技術開發和應用”[71].

81.  In respect of the 2011 Index, I point out that there is no evidence on its legal status or its binding effect.  In particular, there is no evidence as to whether it was a statute, a regulation, or a mere policy or guideline.  I accept Mr Chan’s submissions[72] in this regard.

82.  Mr Chan has further submitted[73] that there is no evidence as to the methodology for the interpretation of the 2011 Index, and whether its effects, whatever they were, were subject to other regulations, law or policies. 

83.  There is a good basis for that submission of Mr Chan’s.  At the bottom of the page of the 2011 Index which makes reference to diagnostic DNA technology[74], one finds two Notes.  The 2^nd of the two Notes reads as follows:

「 2. 國務院專項規定或產業政策另有規定的，從其規定。」

There is no evidence as to whether there existed (or not) such other “國務院專項規定或產業政策”.

84.  Dr Tam’s evidence is relevant in this regard:

(a) He says at §38 of Tam/WS1 that:

“ … Since in or about July 2012 to in or about May 2013, [Ds] ought to have known that it would be impossible to establish a private ICL by a WOFE because it was a prohibited category for foreign investments in the PRC. It was only when CEPA Supplements No.9 came into effect could Hong Kong Service Supplier conduct business of ICL in Guangdong province as a WOFE.”

(b) Dr Tam has not specified in Tam/WS1 the basis of his statement that “it would be impossible to establish a private ICL by a WOFE because it was a prohibited category for foreign investments in the PRC”.  He was cross-examined on that.  His relevant evidence is as follows:

「 問： 簽意向書之前，商討期間，你有冇見過呢份目錄？

答： 冇。

問： 簽署意向書之後，喺2015年附近嘅呢段期間，你有冇見過呢份目錄

答： 我正式都冇睇過，就係後來到咗最後我哋五--即係五年之後，我哋要查嘢嘅時候呢，我哋先覺覺得--先知道有一份文件，應該喺12年出嘅文件呢，係講喺--禁止嘅。

問： 你所指12年出嘅嗰一份文件是否就是而家喺你面前，第384頁[75]呢一份文件？

答： 我直接--我冇睇過詳細嘅嘢，我唔記得咗係邊一個。

問： 你唔知，okay。

答： 應該就唔係呢一份囉。

問： 唔係呢一份？

答： 應該就唔係呢一份，應該唔係呢一份。

…

MR CHAN 所以我個問題就係問番譚博士，佢係以根據乜嘢嘅基礎話到畀法官閣下聽，喺CEPA文件之前，‘it would be impossible to establish an ICL by WOFE’。

答： 就係後來我先至知道原來喺12年有個文件呢，就講話就係外資係唔可以喺中國做基因實驗嘅，prohibited，呢個就係當時第二樣嘢，咁嗰陣時候如果係--如果有呢件文件喺度嘅話，咁冇CEPA，根本係冇可能會做呢樣嘢，咁喺嗰個情況裡面嚟講，即係對方應該知道㗎嘛。

問： 譚博士，是否有第三者同你提過2012年嘅呢一份文件？有定冇？

答： 冇，即係我後來--我都話後來，後來呀，係呢件發生咗嘅事，即係就算我哋就辭退咗佢喇，咁我先至再去查嗰啲，我先知道囉。

官： 亦都再講番清楚啲時段，然後先...

答： 時段就係都...

官： 你...

答： 15年之後

…

問： 譚博士，2015年你知道有一份文件係禁止外商喺國內投資基因實驗嘅，正確嘛？

答： 做DNA檢驗，係。

問： 係，正確嘅？

答： 冇錯。

問： 你所指嘅呢一份文件係第三者話畀你聽吖，定係你自己發現㗎？

答： 當然都係我要人哋查嘅時候畀我哋喇，係我哋公司嗰啲，係咪？一定要查嘅。

問： 你記唔記得係邊個幫你去查㗎？

答： 我唔記得喎，我好--我...

問： 而呢個人查完之後攞番嚟畀你嘅呢一份文件，嗰份文件嘅名稱你記得嘛？

答： 我而家唔記得，就係佢--即係畀啲extra畀我睇嘅。

問： 你有冇就住基因檢驗是否喺2012年可以喺中國有一個外資成立獨立嘅實驗室，呢樣嘢你有冇去徵詢過法律意見唔見到？

答： 冇噃。

問： 唔該晒，譚博士。所以確認一下對你公平嘅，譚博士，所以你所謂基因檢驗係一個禁止項目，純粹係頭先你所講，你搵人去查過，呢個人畀咗一啲文件你睇，你認為唔得，同意嘛？

答： 你講緊咩嘢時間段？

問： 2015年。

答： 2015年嘅時候，我知道呢樣嘢嘅就係呀。」

(c) In the light of Dr Tam’s oral evidence, Mr Chan is correct in submitting[76] that Dr Tam came to his conclusion as set out at §38 of Tam/WS1 on the basis of an unidentified document produced to him by an unnamed third party.  Nor has Dr Tam sought any legal advice on that issue;

(d) On the evidence, I see no sufficient basis for Dr Tam to have drawn that conclusion.

85.  Ms Siu next relies on CEPA Supplement IX[77]. She submits[78] that:

“ CEPA benefits for Hong Kong service providers were only available in a year later, and only extended to cover diagnostic laboratory service in or about January 2013 through CEPA Supplemental IX … In order to be qualified for ‘Hong Kong service provider’ under CEPA, a Hong Kong company must have at least 3 years’ business experience in the relevant service field …, and DCI was not qualified for CEPA status.”

86.  However, the relaxation of any prior restriction and DCI’s inability to qualify go to a different issue.  It is different from and does not prove what the nature and extent of the restrictions were before the relaxation. It does not prove the falsity of the Representation.

87.  For the reasons set out above, I form the view that on the evidence, Ps have failed to prove the falsity of the Representation.

F.6. Mr Chan’s alternative submission that ICL involves not only DNA diagnosis

88.  In the light of my view on the evidence above, there is strictly speaking no need for me to address this alternative submission of Mr Chan.  In deference to submissions made, I make the following findings and observations.

89.  Mr Chan makes an alternative submission[79] to the following effects, that:

(a) The scope of Item七(1) was very specific.  It only refers to “人體幹細胞, 基因診斷和治療技術開發和應用”;

(b) Thus, even if Ps’ reliance on the 2011 Index was correct, the prohibition only covered DNA diagnosis;

(c) But the pleaded Representation relevantly concerns only the provision of “medical diagnostic laboratory services in the PRC”;

(d) An ICL does not necessarily involve DNA diagnosis;

(e) As things turned out, the ICL licence ultimately granted to P2 covers 6 specialties, namely: 醫學檢驗科；臨床體液、血液專業；臨床微生物學專業；臨床化學檢驗專業；臨床免疫、血清學專業;臨床細胞分子遺傳學專業/病理科”[80]. DNA diagnosis is only one of such specialties;

(f) So Ps are in any event unable to prove that the Representation “was false in that a WOFE could not practice in the industry of ICL”.

90.  It is Dr Tam’s evidence that DNA diagnostics was the most important part of P1’s business, and that he had told D2 about it.  He said in the course of cross-examination that:

「 我驚--我唔同意嘅原因就係因為我哋公司由頭開始講，同第二被告所講嘅嘢完全都係由我哋而家做緊嘅diagnostics嘅--DNA diagnostics，DNA diagnostics係檢驗室裡面嘅其中一個最重要嘅一部分，而我哋就要帶呢啲嘢返去中國，都係想我哋達雅高第一嗰個公司係轉入去中國行嘅，呢個就係我由day 1開始同第二被告所講嘅要行嘅一條路，所以呢一個你用捉字蝨又好，咩嘢都好喇，我唔同意。」

In the course of re-examination, he further said that:

「 所以如果係我哋以molecular diagnostics唔計DNA嘅話，我覺得呢個嘅睇法係absurd囉。」

91.  I accept Dr Tam’s evidence in that regard.  However, this Court is concerned with Ps’ pleaded case.  Ps’ pleaded case in respect of the Representation is a general one, that “a [WOFE] can be set up by a new offshore company to provide medical diagnostic laboratory services in the PRC”. It is not specific to the business carried out by P1. Ps’ pleaded case on falsity is also a general one, that the Representation “was false in that a WOFE could not practice in the industry of ICL”.  Taking the 2011 Index at the highest, “外商” is not prohibited from operating an ICL, but only “基因診斷和治療技術開發和應用”.  An ICL can indeed be operated so long as “基因診斷和治療技術開發和應用” is not involved.  The Representation as a general statement is not false.

92.  The above may appear strict.  But it is in my view the only correct approach given the way Ps’ case is pleaded.

93.  For the above reasons, if necessary, I would also have accepted this alternative submissions of Mr Chan’s.  

F.7. Whether fraudulent, negligent or innocent misrepresentation

94.  Given my conclusions above, the several issues as to whether the Representation, if false, were made fraudulently, negligently or innocently are not engaged.

F.8. Whether reliance

95.  I have found that Dr Tam is an honest witness.  I accept his evidence that P1 relied on and was induced by the Representation in entering into the Collaboration Agreement and Commission Agreement.

96.  In this regard, with reference to Clause 8 of the Commission Agreement (which is an “entire agreement clause”), and relying on Nokia Corp v TCT Mobile Ltd [2017] 3 HKC 102, Mr Chan submits[81] that “the contractual estoppel applies.  [P2] is now estopped from relying on any alleged representations by [D2] or [D1].  Ps’ claim must fail in this regard”.  If necessary, I would have rejected that submissions.  It is not part of Ds’ pleaded case that Ps have been contractually estopped as alleged.  In any event, I would have accepted Ms Siu’s submission made orally during her closing that the Representation has in effect been incorporated into the Commission Agreement — see Clause 3.1(i) thereof.

F.9. Conclusion on the Misrepresentation Claim

97.  On the basis that Ps have failed to prove the falsity of the Representation, I dismiss the Misrepresentation Claim.

G. The Breach of Agreements Claim

98.  There are two limbs to the Breach of Agreements Claim:

(a) alleged failure on the part of D1 to obtain the necessary permits/licences for DCI to setup a private ICL in Guangzhou as WOFE from the Ministry of Health; and

(b) alleged failure on the part of D1 to introduce fund investment.

99.  I deal with the two limbs in turn.

G.1. Alleged failure to obtain the necessary permits/licences

100.  I have set out my factual findings above.  No licence has been obtained for Baigao as a WOFE to operate an ICL.

101.  Pursuant to the Commission Agreement, P1 had between November 2012 and September 2013 paid D1 sums in the total amount of RMB 2,250,000[82].

102.  Ps’ case in this regard as put forward by Ms Siu in her written closing[83] is that:

(a) Under the Collaboration Agreement, it was agreed that P1 would incorporate DCI in Hong Kong who would then incorporate Baigao in Guangzhou and D1 was responsible for obtaining final approval and two private independent laboratory licences in Guangzhou and Shanghai;

(b) Although the Collaboration Agreement was called “合作意向書”, it is clear from its contents that the parties intended it to have legal effect and binding;

(c) The parties further entered into the Commission Agreement whereby D1 agreed to obtain all necessary approvals, licences and consent for the setting up and operation of a private and independent molecular diagnostic laboratory for Baigao in Guangzhou within 9 months from the date of the Agreement (ie, by August 2013);

(d) D2 admitted during cross-examination that those necessary licences and approvals included that to be obtained from the provincial level;

(e) Total sum of RMB 2,250,000 had been paid by P1 to D1 under the Commission Agreement.  However, D1 failed to obtain the necessary permits and licences for Baigao.  It was only until 10 May 2013 did D2 tell Dr Tam that in order for Baigao to obtain business licence, DCI need to obtain CEPA status which turned out to be impossible because DCI was a new company carrying no substantial business at that time;

(f) D1 was therefore in breach.

103.  Ds’ case in this regard as summarized by Mr Chan[84] is that:

(a) The Collaboration Agreement was only a memorandum of understanding (合作意向書) and did not contain any binding contract; and

(b) D1 did obtain all the permits/licences in compliance with its obligation under the Commission Agreement.

G.1.a. Whether the Collaboration Agreement binding

104.  I consider first of all this sub-limb of the Breach of Agreements Claim based on the Collaboration Agreement.

105.  Mr Chan submits[85] that the Collaboration Agreement was not intended to be binding as:

(a) it was called a memorandum of understanding (合作意向書);

(b) Chapter 1 thereof (第一章)[86] stated that it was a framework document (框架性協議);

(c) at Clause 2 of Chapter 1 thereof (第二條)[87], it was stated that details were needed to be confirmed in the formal agreement and other supplemental agreement;

(d) the Collaboration Agreement was only an agreement to agree.  As such it is unenforceable for want of certainty: see Chitty on Contracts (32^nd ed) §2-143.

(e) At trial, Dr Tam also agreed that the Collaboration Agreement is only a guidance document.

106.  I have considered the contents of the Collaboration Agreement.  I regard the following matters as relevant:

(a) In terms of structure, it was a 5-page document (excluding the annexures[88]). It contained:

(i) “第一章 總則”

(ii) “第二章 合作各方”

(iii) “一、Diagcor China的商業模式”

(iv) “二、投資步驟”

(v) “三、投資條件”

(vi) “四、Diagcor International & Diagcor China架構”

(vii) “五、廣州百皋和上海百皋架構建議”

(viii) “六，雙方達成的共識”;

(b) It was a framework and strategic document setting out the steps to be taken to develop what was described as a中國大陸首家外商投資的獨立醫學檢驗中心連鎖企業”[89];

(c) Initial public offer and the attaining of public listing was envisaged;

(d) Business structure with “廣州百皋”, “上海百皋”, “北京百皋”, “成都百皋” and “二線城市加盟者” were mentioned and contemplated;

(e) Various capital injection and shareholding changes at different stages of the business venture were mentioned;

(f) Any of those steps would require a large amount of detailed agreements to be negotiated and agreed upon;

(g) Even in respect of the formation of DCI, 第二條acknowledged the need for further confirmation, that:

「 本意向書為合作框架協議，在建立合資公司[DCI]的具體事宜需在正式合作合同和其他補充協議中進一步予以明確。」

107.  The overall contents of the Collaboration Agreement in my view supports Mr Chan’s submissions that it was, and was intended to be, an agreement to agree.

108.  Ms Siu submits[90] that第二條of the Collaboration Agreement provided[91] that “本意向書與正式合作合同和其他補充協議構成不可分割的整體，作為未來合資公司雙方的法律文件”.  She relies on Branca v Cobarro [1947] K.B. 854 and submits that the provisional agreement was binding until it was superseded when the formal agreement was drawn up and signed.

109.  Branca v Cobarro in my view does not assist Ps.  In that case:

(a) the agreement concerned was one whereby the defendant agreed to sell to the plaintiff a mushroom farm for 5,000l., of which 500l. was paid by way of deposit;

(b) at the end of the document concerned was the following clause:

“ This is a provisional agreement until a fully legalized agreement, drawn up by a solicitor and embodying all the conditions herewith stated, is signed.”

(c) The issue turned on whether the drawing up and signature of a formal document was to be a condition of there coming into existence a binding contract;

(d) The Court held that it did not.  In arriving at that conclusion, Lord Greene M.R. observed at 856 that:

“ Down to the end of the paragraph preceding that final paragraph there can be no question to my mind that the document is a contract. If that final paragraph had not been there, no question could have been raised about it.”

(e) It was quite clear that in Branca v Cobarro, the contents of the document concerned was sufficiently certain to be enforced as a legally binding contract;

(f) The contents of the Collaboration Agreement however were not.

110.  For the reasons set out above, I accept Mr Chan’s submission that the Collaboration Agreement was, and was intended to be, an agreement to agreement, and lacked the necessary certainty to be legally enforceable.

111.  I dismiss this sub-limb of the Breach of Agreements Claim.

G.1.b. The Commission Agreement

112.  Ms Siu submits at §51 of her written closing that:

“ The parties further entered into the Commission Agreement whereby D1 agreed to obtain all necessary approvals, licences and consent for the setting up and operation of a private and independent molecular diagnostic laboratory for Baigao in Guangzhou within 9 months from the date of the Agreement (i.e., by August 2013).”

113.  The correctness (or otherwise) of that submission has to be considered with reference to the terms of the Commission Agreement.

114.  The Commission Agreement contained the following relevant terms:

“ 3.1

…

(i) …[P1] hereby agrees to commission [D1] and [D1] hereby agrees to take the sole responsibility to undertake, execute and complete all the work and activities required in connecting with obtaining all the necessary approvals, licenses and consent from the relevant city and district regulatory authorities for successful completion of the setting up and operation of a private and independent molecular diagnostic laboratory in Guangzhou including but not limited to the preparation of approval of Project Application Report, approval for the design of laboratory from the relevant authority, selection of the site for the laboratory and any application in relation thereto and building of the laboratory in that site according to the Project Application Report or Feasibility Study report (as the case may be) that meets all the statutory and regulatory requirements thereby enabling [P1] and [DCI] or their designated agent to form a wholly owned foreign enterprises known as DiagCor (Guangzhou) Molecular Diagnostic Service Limited as the holder of all the business licences necessary for running the laboratory in Guangzhou and as the operator of the laboratory services in Guangzhou (the ‘Commissioned Work’); and

(ii) Unless otherwise agreed by the Parties, [D1] hereby agrees to complete the above Commissioned Work within nine (9) months from the date of this Agreement.

…

4. Obligation of [D1]

[D1] hereby agrees to use its best endeavour to obtain all necessary regulatory requirements for the setting up and operation of a private and independent molecular diagnostic laboratory in Guangzhou including but not limited to name search, preparation and submission of Project Application Report together with the required documents such as the Feasibility Study report, the establishment of WOFE under the name of DiagCor (Guangzhou) Molecular Diagnostic Service Limited, laboratory construction approval, laboratory licence and business licence and usual pre-approval, site selection, obtaining project approval, assistance in securing a lease of the selected site, supervising building up the laboratory facility in accordance with the Project Application Report or other statutory regulations; rendering assistance in preparing and obtaining all necessary documents required for the completion of the Commissioned Work for the WOFE to commence the business and [P1] and [DCI] shall have full control over the functionality of the Commissioned Work the moment it is complete … ” (emphasis added)

115.  Ms Siu’s submissions there are too broad to be accurate.  As Mr Chan has submitted and emphasized[92], who in my view is correct that according to the terms of the Commission Agreement, the obligation of D1 under the Commission Agreement was to use best endeavour to obtain all necessary licences and permits at the city and district level.  Licences and permits at the provincial level were not mentioned.

116.  Ps’ case under this limb faces the evidential difficulty of proving what “all the necessary approvals, licenses and consent from the relevant city and district regulatory authorities” were, and whether they had been obtained.

117.  I have set out above some of the approvals that D1 had assisted DCI to obtain at the city and district levels.  There is no evidence, expert or otherwise, which suggest that they were not all.

118.  Dr Tam’s evidence in this regard is material.  He said upon cross-examination that:

「 問： 唔該譚博士。我想我哋睇睇嗰啲許可證，我想你揭去文件夾4A 589。

答： 幾多頁話？五百...

問： 589，589頁，譚博士，你會見到呢，呢份就係喺2013年3月15日，係龍江區衛生局發出嘅一個信喇，就咁講嘅，『你公司廣州百皋醫學檢驗中心是次申請修飾，根據醫療機構設置的有關法律法規，...（宣讀）符合廣州市蘿崗區醫療機構設置規劃的佈局規劃署，而初步同意你公司嘅是次申請。』所以其實同唔同意，譚博士，喺2013年3月15日呢，第二被告係成功取得咗一個區衛生局嘅許可，去成立呢一個實驗室嘅，同意嘛？

答： 同意。

問： 跟住你睇下第631頁，同一個文件夾。

答： 六百？

問： 31，630，唔好意思，630先。

答： 唔。

問： 630呢個係2013年7月10號由廣州市衛生局發出嘅一封信，內容係咁嘅，『你司向我局申請，設置廣州百皋醫學檢驗中心的事項符合廣州市醫療衛生設施佈局規劃，...（宣讀）轉發衛生部關於印發醫療檢驗所基本標準試行的通知要求，請向省衛生廳提出此申請。』呢個亦都係喺市嘅衛生部提出呢個批准，同唔同意？

答： 同意。

問： 譚博士，今朝有同你講過嗰份commission agreement，你記唔記得？

答： 記得。

問： 當中提過向市同埋省--市同埋區所申請嘅approval就係呢兩個，同唔同意？

答： 有咩嘢分別？

問： 唔係有冇分別，我係同唔同意其實根據commission agreement所訂嘅區同埋市嘅許可，被告都係攞到嘅？

答：喺呢個個案--呢度我同意，我同意。」
(emphasis added)

119.  The fact that ultimately DCI could not get the necessary approvals and licences to carry out an ICL through Baigao does go to prove Ps’ case in this regard, as the problem might have been on the provincial level, as the two emails of 10 May 2013 from D2 appear to suggest.

120.  Further, I accept Mr Chan’s submissions[93] that the evidence is not sufficient to prove that D1 had not used its best endeavor.

121.  On the evidence, I accept Mr Chan’s submissions that no breach of the Commission Agreement has been established.

122.  I dismiss also this sub-limb of the Breach of Agreements Claim.

G.2. Alleged failure on the part of D1 to introduce fund investment

123.  P1’s case under this limb is pleaded at §35 of the ASOC as follows:

“ Further [D1] has failed to introduce fund investment in the sum of USD7,000,000 or any part thereof into DCI, or [P1] or [P2] and is in breach of the Collaboration Agreement and the 2014 Cooperation Agreement …”

124.  Ms Siu summarizes[94] this limb of Ps’ case as follows:

(a) Under the Collaboration Agreement, P1 agreed to invest HK$5 million into DCI and D1 agreed to introduce fund investment into DCI in the sum of USD 7 million[95];

(b) It turned out the investors were only interested in investing in P1;

(c) The parties then entered into an agreement supplemental to the Collaboration Agreement under which D1 promised to raise fund for P1[96];

(d) As committed, P1 first injected RMB 5 million into P2 in December 2013;

(e) Under the 2014 Cooperation Agreement, P1 agreed to lend RMB 20 million to P2 for the purpose of fulfilling capital registration requirement and D1 shall assist to achieve in investment fund raising of USD 7 million for P2[97];

(f) Throughout, D1 has failed to introduce any fund investment into DCI, or P1 or P2;

(g) D1 therefore is liable to pay damages to P1 for breach of the Collaboration Agreement and the 2014 Cooperation Agreement;

(h) As P1 is unable to quantify damages under this head, P1 only claims for nominal damages.

125.  Again, the exact wording of the Collaboration Agreement and the 2014 Cooperation Agreement is important:

(a) Under the Collaboration Agreement[98]:

「 二、投資步驟

*第一步

(1) [P1] and [D1] 在香港成立DCI，開始時雙方分別的股權比例為95%和5%。[P1] 承諾投資500萬元人民幣；[D1] 承諾引進基金投資700萬美元…」 (emphasis added)

(b) Under §2) of the 2014 Cooperation Agreement:

“ 2). Investment fund raising: [D1] shall assist to achieve investment fund raising of USD7M with an equivalent of 35% equity of the ICL Baigao GZ …” (emphasis added)

126.  I have ruled that the Collaboration Agreement is a framework strategic document, and lacked the necessary certainty to be legally enforceable. In my view, this so-called “承諾引進基金投資700萬美元” in “二、投資步驟 *第一步” supports and reinforces my view.  The identity of the “funds” has not been identified.  The terms of the investments have not been specified.  Investment funds are not charities.  They are after returns for their investments.  What DCI could, and was prepared to offer in return for the investments, were matters which could only be determined upon further negotiations and agreements.  As Dr Tam himself agreed upon cross-examination:

「 問： 譚博士，我諗你都會同意㗎喇，其實一個基金會唔會投資喺呢個DCI裡面都好大嘅一個因素，就係要睇下第一被告人佢哋嗰個取態同埋條款嘅，同唔同意？

答：（沒有可聽到的回答）

問： 即係你本人嗰個意向都好重要嘅。

答： 咁--係吖，啱吖。

問： 即係唔係一個第二被告或者第一被告可以單獨決定嘅一個事項？

答： 當然喇。」

127.  According to the 2014 Cooperation Agreement, the wording was to “assist to achieve investment fund raising”.

128.  Hence, whether in the Collaboration Agreement or the 2014 Cooperation Agreement, there was no guarantee by D1 that investments by funds in the specified sizes would definitely be forthcoming.

129.  Dr Tam accepted in evidence that D2 did introduce to P1 several funds, namely Jim Pang, an agent who assisted D2 to find investment funds, Sam Tang of Spring Capital (天泉投資), who Dr Tam said was an investment banker, a Russian Fund, and anther investment fund called Morningside. The relevant emails have been identified and shown to Dr Tam.

130.  D1 there had indeed assisted to achieve investment fund raising.

131.  I do not accept Ms Siu’s submissions, which in effect suggests that because ultimately no investment funds had made investment in the specified size, therefore D1 must be in breach.  That in my view does not follow.

132.  I dismiss also this limb of the Breach of Agreements Claim.

G.3. Conclusion on the Breach of Agreements Claim

133.  For the reasons set out above, I dismiss the Breach of Agreements Claim.

H. Breach of Fiduciary Duties Claim at Stage I

134.  Ms Siu relies on Libertarian Investments Ltd v Hall (2013) 16 HKCFAR 681.  She in particular relies on §68 thereof[99]. She refers to the Experience Representations.  She refers further to the representation set out at §3.1 of the Commission Agreement.  She submits that P1 entrusted and/or depended upon Ds to complete the setting up and operation of an ICL through DCI and Ds undertook an obligation to act in the interests of P1 in executing and completing the works.  She submits that D1 to D3 therefore owed fiduciary duties to P1 and they breached such duties for lack of appropriate knowledge, skill or care as to all the relevant laws, regulations or policies of the Mainland in relation to successful completion of the setting up and operation of a private ICL in the form of WOFE.

135.  Ms Siu has not in her written submissions elaborated on the nature of those fiduciary duties or why Ds are said to have been in breach.  They can be found:

(a) in so far as the nature of the duties is concerned, at §§38(1) and (2) of the ASOC, which I have reproduced above;

(b) in so far as the breach is concerned, at §39 of the ASOC:

“ By virtue of the matters pleaded in paragraphs 19 and 21 above, [D1] and/or [D2] and/or [D3] has failed to obtain the permit to build a private ICL in Guangzhou as WOFE under DCI from the Ministry of Health and is in breach of the Fiduciary Duties …”

136.  Mr Chan submits[100] that:

(a) there is no fiduciary relationship between P2 and D1.  The relationship is strictly commercial; and

(b) in any event, if fiduciary duties were imposed between contracting parties such as in the present one, the scope of the duties would be limited by the scope of the contractual obligations.

137.  For the following reasons, I find that this part of P1’s claim is not made out.

138.  No fiduciary duties:

(a) I do not accept that Ds owed P1 (or P2) fiduciary duties as alleged.  As explained by Ribeiro PJ in Libertarian, whilst fiduciary duties may well arise as aspects of a commercial relationship[101]:

“ 70. … There are nonetheless many cases where, after scrutiny by the court, no fiduciary element is found to arise and no basis exists for equity to intervene in what is a purely commercial relationship.

   71.   In such commercial relationships, the parties deal with each other as principals and at arm’s length, each looking after his own interests.  Disputes between such parties usually only give rise to common law causes of action and remedies.  Any part played by equity tends to be in its auxiliary jurisdiction in support of the common law.”

(b) As also explained by Ribeiro PJ, the essence of a fiduciary relationship is that one party exercises power on behalf of another and pledges himself or herself to act in the best interests of the other[102];

(c) In my view, the present situation, in so far as Stage I is concerned, is one of a commercial relationship in which the parties dealt with each other as principals and at arm’s length.

139.  The nature of the alleged fiduciary duties is not supported by any authorities:

(a) I have set out above the pleaded fiduciary duties which Ds are alleged to have owed to P1;

(b) The duties in effect amount of a guarantee of the application being successful: “knowledge of and to ensure full compliance of all the relevant laws and regulations of the PRC”, and “a duty to provide all practical solutions to address the concerns of [P1]”;

(c) Ps’ case is well beyond that of, eg breach of duty of reasonable care;

(d) In the absence of authorities, I do not in any event accept that in the circumstances of this case, Ds owed P1 or P2 any of the duties as pleaded.

140.  Breach not proved:

(a) As is clear from §39 of the ASOC reproduced above, Ps equate the failure to obtain the permit to build a private ICL in Guangzhou as WOFE under DCI per se to breach;

(b) Though I have rejected D2’s evidence that P1 was required to prove that DCI or P1 was registered as a medical establishment in Hong Kong, and have found that the failure was due to the fact that DCI did not qualify for CEPA status, whether that constituted any breach remains dependent upon matters like what the legal and regulatory regime in the Mainland was, whether there had been any changes at the material time, and what could have been done to address the issues.  I have made my observations above on the lack of expert evidence on the relevant legal and regulatory regime in the Mainland.

141.  For the above reasons, I dismiss Ps’ Breach of Fiduciary Duties Claim at Stage I.  I proceed to Stage II.

I. The way the Stage II claims are pleaded

142.  I refer back to way in which the Stage II claims are pleaded in the ASOC.  I refer also to the agreed issues set out above.  At Stage II, the 2 overarching causes of action are conspiracy to defraud and breach of fiduciary duties.  In the words of Ms Siu[103], the “4 items [of the [Sulong Agency Agreement], the LIS Contracts, the Secret Branch office and the Misappropriation of Funds are] pleaded by [Ps] for the above causes of actions”.

143.  That being the way Ps’ case at Stage II is pleaded, I will first of all consider the facts relevant to the 4 constituent matters.  I will then come back to the 2 overarching causes of action in the light of those facts.

J. General backgrounds facts

144.  Relevant to the Stage II claims, I accept the following evidence given by Dr Tam.

145.  As I have found above, no licence has been obtained for Baigao as a WOFE to operate a private ICL.  That was because DCI did not qualify for CEPA status.  In mitigation of its loss, Ps went for the CEPA route by virtue of P1’s status.

146.  On 18 June 2013, the Trade and Industry Department issued a certificate of Hong Kong Service Supplier to P1 under the CEPA.

147.  Approvals that had until then been obtained by DCI would for the above purpose be transferred to P1.

148.  P1 subsequently incorporated P2 in Guangzhou on 28 October 2013.  A business licence was on that day obtained by P2 from the Administration of Industry and Commerce of Guangzhou Municipality.

149.  As the management of P1 did not have the experience or knowledge of establishing and operating an ICL in the Mainland, P1 continue to seek assistance from Ds.  D2 and D3 were therefore engaged by P1 as its consultants to help with the establishment and operation of an ICL in Guangzhou through P2.

150.  For the above purpose, D2 was appointed by P1 to be the general manager and a director of P2, and D3 the legal representative, president and a director of P2.  They formed the senior management of P2 and controlled its daily operation.

K. The LIS Contracts

K.1. The evidence adduced by Ps

151.  The evidence adduced by Ps in relation to the LIS Contracts are far from satisfactory.

152.  The LIS by nature was technical.  What it comprised was controversial. On top of that, what was intended to mean when a person or a document mentioned LIS was also not clear.  It could have been intended to mean just the software, or intended to include the hardware.  It should also be noted that Ds contend that the LIS setup suitable for P2 involved 6 clinical areas (or specialties)[104]. Depending on what LIS comprised or was meant to comprise, the price involved would have been very different.

153.  It further does not help that the witnesses called by Ps were mostly not involved in the daily operation of Ps at the material time.  It is Ps case that they only discovered about the 2^nd and 3^rd LIS Contracts after D2 and D3 had been removed from their offices.

154.  The following evidence of Dr Tam is of special relevance:

(a) In Tam/WS1[105], he said which I accept that D2 on about 12 September 2013 first told him about the costs for developing the LIS.  It was about RMB 900,000.  D2 also briefly introduced him to Wu Fan.  D2 said that Wu Fan was an employee of中軟, a software company in the Mainland which could develop the LIS;

(b) However, upon cross-examination, Dr Tam said that he was not an IT man, and he did not ask D2 what the LIS included;

(c) Dr Tam said he attended the first board meeting of P2 on 15 January 2014 (the “P2 15/1/2014 Board Meeting”).  He said D2 reported the need for developing the LIS and said that he knew中軟which could do that for about RMB 900,000.  D2 also briefly mentioned that the whole IT system of P2 which included the LIS, laboratory reporting system etc would be about RMB 2,000,000.  Dr Tam’s understanding was therefore always that the LIS would cost about RMB 900,000[106];

(d) §四8. of the minutes of that board meeting of P2 (“P2 15/1/2014 Minutes”)[107] records that:

「 1月17-19日與中軟的IT團隊在香港開會，共同討論實驗室信息流、財務及行政管理信息化的開發及維護方案。整個IT系統工程預算為200萬元。」

(e) There was however on the face of the P2 15/1/2014 Minutes no mention of the figure of RMB 900,000, or what that sum was for;   

(f) During cross-examination, Dr Tam also accepted that he did not know what that budget of RMB 2 million included.  His evidence in this regard was as follows:

「 問： 明白。睇番頭先同你睇嗰個會議紀錄喇，譚博士，719頁，第8條都係呢個喇，所謂--即係『整個IT系統工程預算為2,000,000元。』其實我向你指出，呢2,000,000元包啲乜嘢呢，其實你係唔知嘅，同意嘛？

答： 可以咁講囉，我唔知道佢totally係乜嘢，我唔知。

問： 同埋呢個預算係有可能改變嘅，你同唔同意？

答： 呢個我就唔知道。」

(g) I can see room for misunderstanding there;

(h) Dr Tam said that after that meeting, neither D2 nor D3 had updated him or other directors of P1 and P2 about the costs of developing the LIS;

(i) Dr Tam however resigned as a director of P2 in about April 2014 and was not involved in any direct operation of P2 after that;

(j) Dr Tam said[108] he had never been told that D1 was capable of developing the LIS, that he was not aware of the 3^rd LIS Contract until after D2’s and D3’s removal, and he could not have approved the same.

155.  Wong’s evidence does not bear upon the LIS Contracts Claim.  He also confirmed upon cross-examination that he had no knowledge about the hardware installation in respect of LIS.

156.  The following evidence of Au is of special relevance:

(a) Au’s involvement in the LIS Contracts was limited.  He only joined P1 as CFO on 2 May 2014, and was not appointed a director of P2 till July 2014;

(b) In Au/WS[109], he said which I accept that he was made aware of the development of the LIS for P2 in about July 2014 when D2 requested funding to purchase hardware to support the installation of the LIS.  His next recollection of the LIS was in about January 2015 when the LIS was still not operational and he questioned whether that would affect Ps’ ability to start processing samples at P2’s laboratory. He denied having approved the budget for the purchase of the LIS or the LIS Contracts, as he had not joined Ps by then;

(c) During cross-examination, he said that a colleague of his called Karen had told him about the budget in respect of LIS.  The budget was about HK$2 million. Karen had also shown him a contract in respect of LIS.  He could no longer remember its contents.  With reference to the P2 15/1/2014 Minutes, he said that he did not know whether P2’s board had approved the budget of HK$2 million, had seen no board resolution in that regard, but that he had raised no objection or question in respect of the same.

(d) He was shown during cross-examination a document called “Baigao 3-Year P&L and Cash Flow Analysis” (the “Baigao 3-Year P&L and Cash Flow Analysis”).  It was sent by D2 to Au under cover of an email of 7 June 2014.  The email was copied to inter alios Dr Tam.  Amongst it was a table[110] showing the cash flow of P2 from December 2013 to June 2015.  Au accepted that that table showed a sum of RMB 1,950,000 for April 2014 in relation to “軟件 & SOP”;

(e) Whilst I accept that Au is an honest witness and accept his evidence cited above, his evidence is again of limited value for the purpose of considering the LIS Contracts Claim.

157.  The following evidence of Chow is of special relevance:

(a) In Chow/WS, Chow said that his role in relation to the LIS was simply to advise on the technical requirements of the LIS based on P1’s existing platforms.  He was not involved in contract negotiation or the approval process on behalf of P2.  He said that during the P2 15/1/2014 Board Meeting, D2 said that中軟could offer a special discount rate for P2 for developing the LIS and that the costs for developing the LIS was about RMB 900,000.  He further said that he was not involved in the delivery of the LIS to P2, that to his understanding, the LIS developed by Wu Fan was not completed or functional, and that he was not aware of any sign-off and/or examination documentation for the delivery of the LIS to P2.

(b) However, upon cross-examination, he said that he could not recall the details of what D2 explained to the board during the P2 15/1/2014 Board Meeting, that:

「 問：咁你記憶當中，喺個會議當中，第二被告（即係陳永善先生）有冇向過董事局解釋過，整個IT系統包括啲乜嘢呀？

答：呢個我唔係好記得喇。

問：佢有冇講解到整個IT系統是否包括LIS你都唔記得㗎喇？

答：唔係好記得。

…

問： 首先陳永善有否解釋過整個IT系統工程包括啲乜嘢？

答： 整個IT系統嘅工程包括啲咩嘢，我唔係好記得。

問： 唔記得。係，我哋一個個問題嚟。

答： Okay。

問： 陳永善有冇喺董事局當中特別就住LIS系統作任何嘅解說？

答： LIS系統因為佢係屬於IT裡面嘅，係一定有討論過嘅。

問： 我向你指出，陳永善從來冇喺董事局會議裡面講LIS系統係值¥900,000，你同唔同意？

答： 呢個我唔係好記得。」

(c) Chow also accepted that he had not inspected the LIS himself.

158.  The following evidence of Guo is of special relevance:

(a) In Guo/WS, Guo said that during the P2 15/12014 Board Meeting, D2 reported on the need for developing a software system to run the LIS, and that he said that he knew中軟which could do that. She said that she only discovered the 1^st, 2^nd and 3^rd LIS Contracts after the removal of D2 and D3 from their offices. Upon checking the records, it was discovered that P2 on about 2 April 2014 paid D1 RMB 2,765,000.  She also confirmed that the LIS developed by Wu Fan was not functional;

(b) Upon cross-examination, and with reference to the P2 15/1/2014 Minutes, Guo said she had no idea what the “IT system” mentioned therein entailed;

(c) She found no record of Wu Fan having been paid under the 1^st LIS Contract.  All she could find was record showing that RMB 2,765,000 had been paid by P2 to D1;

(d) She confirmed that a LIS had been built and installed for P2, though it had problems.  Her evidence in this regard, with reference to an email from Wu Fan to D2 dated 6 August 2014[111], was as follows:

“ Q. Starting with, ‘陳總你好’. The content the witness can read to herself. Right. This email suggests that LIS is developed and installed to a point where it’s ready for testing. Right. At the top part of the email, you see the 2^nd defendant proposing to have Dr Guo to coordinate a session to run a remote demo plus Q and A.

A. Right.

Q. Do you recall conducting this remote demo, Dr Guo?

A. I did.

Q. Was the demo successful?

A. There were problems during the demonstration, and we discussed them.

Q. Right. But certain functions could be carried out. Would you agree with that?

A. Some of the functions, yes.

Q. Very well …”

(e) She also confirmed that certain hardware purchased by P2 in the course of developing the LIS.

K.2. Ds’ case, and the evidence adduced in support

159.  Ds’ conduct of their defence in this regard has been highly unsatisfactory.

160.  As I have summarized above, Ds pleaded defence in this regard is that all LIS Contracts where authorized and approved.  They further pleaded that both the budget subscribed for the purchase of LIS and the 2^nd and 3^rd LIS Contracts had been approved by inter alios Dr Tam and Au.

161.  Au could never have given any contemporaneous approval to the budgets or the 2^nd/3^rd LIS Contracts.  He only joined P1 as CFO on 2 May 2014, and was not appointed a director of P2 till July 2014.  D2 himself accepted that Ds got that wrong in the ADef.

162.  Both D2 and D3 in their respective witness statements say that the other one is going to deal with the LIS Contracts, with the result that neither has.

163.  However, when under cross-examination, D2 and D3 came up for the first time with the Alleged Back-to-Back LIS Arrangements (which I have summarized above).  But:

(a) the relevant facts have neither been pleaded, nor even mentioned in their witness statements; and

(b) further, as submitted by Ms Siu[112], which I agree, the Alleged Back-to-Back LIS Arrangements are not backed up by any documentary evidence, and have not even been put to Ps’ witnesses.

164.  It should further be noted that despite the 1^st LIS Contract and the 2^nd/3^rd LIS Contracts being alleged to have been back to back, their respective sums do not tally.  In this regard, both D2 and D3 claimed that the difference of about RMB 810,000 were used towards payment of some other sums for which no invoices were or could be issued.  No particulars have been offered.  Nor are they explained in their witness statements. 

165.  The evidence given by Chen QJ is also problematic:

(a) During cross-examination, D2 said that he mentioned during the P2 15/1/2014 Board Meeting RMB 900,000 as the price for one of the 6 specialities.  His evidence in this regard was:

「 問： 咁即係你冇提及過九十萬呢樣嘢？

答： 我大概講過係應該係唔到一百萬嘅。

問： 唔到--我哋清晰啲，唔夠一百萬係一個數字喇，九十萬係另外一個數字嚟嘅，咁你有冇講過九十萬呢？

答： 如果妳咁提番我，我都可--如果要我當時有準確講，我都會講九十萬嘅，因為一個specialty九十萬，咁如果六個specialty嘅話，估計都要五百四十幾萬。

問： 喺呢一個會議入面有講？你嘅意思。

答： 係，係。

問： 而喺呢一個會議紀錄入面冇反映出嚟？

答： 會議記要呢，唔會capture晒所有中間啲討論㗎，咁但係有好多討論都會發生咗嘅。」

(b) However, Chen QJ said upon cross-examination that:

「 問： 唔，妳有冇聽過¥900,000呢個預算呀？做LIS system，¥900,000，有冇聽過呀？

答： ¥900,000？冇。

…

問： 唔，妳有冇聽過¥900,000做一個服務範疇，或者一個項目嘅呢一個預算呀？

答： 冇。

問： 有冇聽過如果做六個項目嘅話，就要¥5,400,000？

答： ¥5,400,000，呢個我冇聽過。」

(c) In respect of the amount agreed with Wu Fan, Chen QJ in Chen QJ/WS said[113] was that the LIS system comprised 2 parts.  One part was the LIS system programming itself, which cost RMB 1.45 million.  The other component was the design of the Standard Operation Procedure (“SOP”).  One SOP was necessary for each of 6 areas of diagnostic services (or specialties).  Each costs RMB 100,000.  As P1 was familiar with the field of DNA related service area, it would draft that part of the SOP.  Wu Fan would draft the other 5.  The total amount was therefore RMB 1,950,000;

(d) That however is not Ds’ pleaded defence.  They simply pleaded[114] that “the initial estimate for the LIS system was around RMB900,000”, and that “[h]owever, the LIS setup suitable for [P2] involved 6 clinical areas and was therefore more advance than a single unit initially estimated by [D2]”.

(e) Chen QJ further said during cross-examination that:

「 答： 但係因為係早期我凈係聽佢哋講過如果喺國內搵嗰啲專業嘅--即係大行，即係做編程嗰啲，人哋至少要接係¥5,000,000以上嘅項目先會接嘅，咁所以吳帆係屬於嗰種即係私下接，即係我自己part-time咁樣接單咁去做呢個系統，咁所以可能就組成就係百幾萬。

問： 唔，唔。

答： 但係我知道如果好似國內中軟呀嗰啲，好似都要成¥5,000,000起先會接單做囉。

問： 唔，唔。

答： 呢一方面我係聽佢哋講過嘅。

問： 聽邊個講過？

答： 聽佢哋董事會嗰邊講囉，因為佢哋商量係咪搵吳帆嗰邊做。

問： 「董事局」嘅意思係百皋嘅董事局？

答： 唔，因為佢哋都會--都幾經常會落嚟開會呀，同埋了解情況呀。

問： 妳記唔記得係董事會嘅邊個人講㗎？

答： 邊個人就唔知喇，唔記得喇，但係當時係全部董事都會在場㗎囉，包括黃總呀，同埋侯總呀，因為黃總係屬--係負責技術方面嘅，當時亦有一個叫做周國輝（譯音）嘅人係同陳總一齊負責開呢個系統。」

(f) What she claimed there is not in her witness statement;

(g) Further, she claimed that the matter was discussed in the board in the presence of all the directors (see the last answer quoted above).  That has not however been canvassed with or put to the witnesses called by Ps;

(h) She claimed[115] that she has jotted down some of the relevant   expenses in her notebook[116].  However, when cross-examined on the same, she could not recall during which board meetings when those matters were allegedly discussed.

166.  Both on credibility, reliability, and the fact that they being unpleaded, I do not accept the Alleged Back-to-Back LIS Arrangements asserted by D2, D3 and Chen QJ in the course of their evidence.

K.3. The material findings

167.  In the end, the material facts of Ps’ claim relevant to the LIS Contracts boils down to the following, which I am able find:

(a) §四8. of the P2 15/1/2014 Minutes records that:

(b) 「 1月17-19日與中軟的IT團隊在香港開會，共同討論實驗室信息流、財務及行政管理信息化的開發及維護方案。整個IT系統工程預算為200萬元。」There is no reliable evidence showing what the “整個IT系統工程” was meant to refer to or comprise of;

(c) Wu Fan signed on the 1^st LIS Contract[117], which was dated 24 February 2014;

(d) The contract sum of the 1^st LIS Contract was RMB 1,950,000;

(e) The 1^st LIS Contract was however not executed by P2. The version produced does not bear any authorized signature of P2 or its seal;

(f) There is no record or evidence of Wu Fan having been paid under the 1^st LIS Contract;

(g) P2 entered into the 2^nd LIS Contract with D1[118] for the same system as described in the 1^st LIS Contract.  It was also dated 24 February 2014.  D3 signed for P2.  A “Olivia Lau” signed on behalf of D1, though the name printed immediately underneath was “林佩娟”.  The contract sum was RMB 2,765,000;

(h) P2 entered into the 3^rd LIS Contract[119] with D1 for the same system as described in the 2^nd LIS Contract and at the same price.  It was dated 25 February 2014.  D3 signed for P2.  林佩娟, described as the authorized representative, signed for D1;

(i) I do not accept Ds’ case that Dr Tam or Au had, as pleaded by Ds, approved the 2^nd and 3^rd LIS Contracts;

(j) As an attachment to an email sent on 28 March 2014 by D2 to Hau (copied to D3, Dr Tam and Wong), D2 sent to Hau an Excel spreadsheet.  The subject of the email was “Capital Expenditure and 2014 Operating Expenses”. That Excel spreadsheet was a table entitled “[P2] 固定資產費用預算(RMB)”[120] (the “2014 Budget Table”).  On 1 April 2014, Hau by email[121] to D2 commented on the 2014 Budget Table.  Hau’s email was also copied to inter alios D3, Dr Tam and Wong.  As can be seen from the 2014 Budget Table, the total sum of RMB 1,950,000 was set out therein as one of the items against “軟件 & SOP”;

(k) On 2 April 2014, P2 transferred HK$3,448,060.86 to D1[122];

(l) As mentioned above, a sum of RMB 1,950,000 for April 2014 in relation to “軟件 & SOP” was mentioned in the Baigao 3-Year P&L and Cash Flow Analysis.  It was sent by D2 to Au under cover of an email of 7 June 2014, and was copied to inter alios Dr Tam;

(m) §2(d) of the minutes of the board meeting of P2 held on 29 January 2015[123] records that:

“ 2d) Readiness of LIS system: current status and scheduled operation review

LIS was scheduled to go live on Feb 15, covering test order entry all the way to report generation.

Stocking recording is also included in the scope.  Accounting and HR are not in the current scope.”

(n) A LIS had in fact been developed for P2, though there were problems with its functions.  Wu Fan was involved in the process of the development of the LIS.  There were amongst the bundles a number of emails from Wu Fan in that regard.  I have mentioned above the one dated 6 August 2014[124] from Wu Fan to D2.  D2 subsequently on 12 August 2014 in effect forwarded it to inter alios Chow, Wong and Guo;

(o) Some of the hardware purchased in the process could also be continue to be used.

L. The Sulong Agency Agreement

168.  The evidence in relation to the Sulong Agency Agreement is again far from clear.  I deal with them below.

L.1. The evidence adduced by Ps

169.  I deal with one preliminary point on Ps’ ASOC first:

(a) I have summarized above Ps case in respect of the Sulong Agency Agreement;

(b) It is not part of Ps’ pleaded case in this regard that Ds were in position of conflict because Sulong was related to Ds, or because of any position which D3 held with Sulong;

(c) In the course of evidence, Ms Siu canvassed with the witnesses called by the defence whether Sulong was a subsidiary company of D1, and whether D3 held an office with Sulong;

(d) In her written submissions, Ms Siu relies on the draft Collaboration Agreement where it was said at Clause 6[125] that Sulong was a subsidiary company of D1.  She also relies on the fact that D3 was a監事of Sulong;

(e) Given Ps’ pleaded case, I hold that such evidence is irrelevant for the purpose of considering the Sulong Agency Agreement[126];

(f) I record that in the course of her oral closing submissions, Ms Siu accepted that no allegation of conflict in this regard has been pleaded in the ASOC.

170.  A copy of the Sulong Agency Agreement has been produced[127]. It was between P2 and Sulong.  It was dated 1 April 2014.  The preamble thereof suggested that Sulong was appointed as the agent for promoting and developing P2’s diagnostic services in the Mainland.  Clause三1. thereof suggested that Sulong was to charge as its service fees a percentage of P2’s income.  Clause五4. thereof provided that:

「 [Sulong] 負責協助 [P2] 開發和維護客戶，並協助[P2] 催收醫療機構應付之服務費。」

171.  Between 23 October 2014 and 4 March 2015, P2 had paid Sulong 7 sums in the total amount of RMB 488,000 (the “Sulong Payments”).

172.  According to Dr Tam[128], P1 was not aware that P2 had signed the Sulong Agency Agreement until D2 had been removed from his office.  He further said that the payment to Sulong was not authorized by the board of P1 or P2.

173.  Wong in Wong/WS1[129] said that “the payment to Sulong was not authorized by the board of [P2] and not according to the [Sulong Agency Agreement]”. 

174.  There, Wong was addressing the Sulong Payments.  He was not addressing the Sulong Agency Agreement itself.  In fact, upon cross-examination, he accepted that the Sulong Agency Agreement was effective despite not having been specifically authorized by P2’s board.  His evidence in this regard was as follows:

「 問： 係，呢一份文件簽署當時係冇通過董事局決議嘅？

答： 冇。

問： 亦都冇諮詢過董事局嘅，聽你嘅講法？

答： 唔係好--冇咁specific話我同--即係甲方會同邊一間同邊個人簽係冇討論過嘅，亦都冇提過嘅。

問： 好，廣州素隆呢間公司，Chris Chan有冇向董事局講過？

答： 冇。

問： 所以就住呢份代理協議，董事局係唔知情嘅？

答： 董事局唔知情，落...

問： 但係你都係會承認有效？

答： 係。

問： 個原因係乜嘢，既然董事局唔知喇，當然董事局冇批准過喇，但係你今日喺庭上面你作供，就係董事局仍然係承認有效，咁根據啲咩嘢基準董事局會覺得呢份合約係有效呢？

答： 呢個係我個人覺得啫，就唔係話整體董事局嘅成員都會覺得有效。咁喺我嘅意見呢，就係我覺得呢個係有效。

問： 係，你根據啲乜嘢基準係認為呢份有效？

答： 係根據佢即係日常充運作--因為曾經同我提過，即係個人喺溝通嗰時有提過會有呢間公司會做一啲物流嘅工作。

問： 你話呢一間公司講嘅係素隆有限公司？

答： 冇specific提到邊一間公司，會有一間公司同我哋做一啲物流，即係運輸收集嘅工作。

問： 呢個係第二被告同你提過嘅？

答： 係。

問： 記唔記得幾時？

答： 唔記得。

問： 記唔記得係用乜嘢方式？

答： 口頭上傾偈。」

175.  Guo said[130] that after she had been appointed the Deputy General Manager and Legal Representative of P2, she found out about the Sulong Agency Agreement.  She discovered then that P2 had paid Sulong the Sulong Payments.  She discovered from the records the relevant payment requests or reimbursement claim forms, the vouchers and invoices.  She said that according to the Sulong Agency Agreement, the services fees charged by Sulong should be calculated on the basis of the total income received by P2 for its medical diagnostic services and that P2 should pay Sulong within 1 week after it had received payment from other institutions.  She confirmed that P2 did not conduct any business during the period from October 2014 to March 2015.  She therefore said that the Sulong Payments were unfounded, and that D2 and D3 should not have approved them when no chargeable services had been rendered by Sulong.

L.2. The evidence adduced by Ds

176.  I have set out above the material evidence given by D2 in relation to the Sulong Agency Agreement.

177.  D3 in D3/WS said that her duties as the legal representative and director of P2 were to ensure that P2 could quickly and swiftly establish its base in the Mainland and to expand P2’s business and clienteles.  To achieve that goal, she decided that it was important to reach out to as many potential clients as possible so as to make their presence known.  She referred to what D2 had said, that P2 did not have a marketing or logistic team.  She said that the board of P2 resolved to assign the marketing work to Sulong.  Beyond the above, she offered no details in respect of the Sulong Agency Agreement or the Sulong Payments.

178.  Then, under cross-examination, she accepted that it was she who signed on the relevant vouchers and authorized the Sulong Payments.  She said that they were promotion expenses, monies which nurses, doctors and hospitals wanted to charge but would not issue any invoices.  I note that none of those appear in her witness statement.

179.  In her witness statement, Chen QJ did not deal with the Sulong Agency Agreement. Under cross-examination she said that the invoices issued by Sulong were handed to her by D2.  The payments were authorized by D3.  She processed the Sulong Payments as instructed.

L.3. My findings

180.  I find that:

(a) D2 and D3 did cause P2 to enter into the Sulong Agency Agreement with Sulong;

(b) D2 and D3 did cause P2 to pay Sulong the Sulong Payments;

(c) Ps’ boards had not expressly authorize the execution of the Sulong Agency Agreement;

(d) In spite of that, the Sulong Agency Agreement was a valid agreement binding on P2; 

(e) P1 had no contemporaneous knowledge of the payment of the Sulong Payments;

(f) I do not accept the explanations given by D2 and D3 in respect of the Sulong Payments, which are not particularized in the ADef, and did not appear in their respective witness statements;

(g) I accept Guo’s evidence that P2 did not conduct any business during the period from October 2014 to March 2015.

M. The Secret Branch Office

M.1. The evidence adduced by Ps

181.  The evidence adduced by Ps in this regard was scanty.  Guo said[131] that in about March 2015, a company registration search regarding P2 was conducted to make sure that its company registration was proper.  It was then discovered that a branch office of P2 was set up in Panyu on 17 November 2014 (the “Branch Office”).  The responsible person was a Lin Qicai.  It was then discovered that D3 signed all the relevant documents for the setting up of that office.  Guo said that no board resolution of P2 had ever been passed in that regard.  She said[132]:

“ Such conduct of secretly setting up a Branch Office has injured [P1’s] and [P2’s] interest as the Branch Office could do a lot of things in the name of [P2] without [P1] and [P2] being aware of it.” (emphasis added)

182.  P has otherwise not able to adduce any evidence to show the purpose why the Branch Office was set up, what had been done in the name of the Branch Office, what interest of P1 or P2 had been injured, or what damage Ps have suffered as a result.

M.2. Evidence adduced by Ds

183.  D3 said in her witness statement that the Branch Office was set up to “diversify and hedge the risk involved”[133] in P2 signing contracts with Sulong and clients in relation to payment of promotion fees.  She also said that since incorporation, the Branch Office had carried out no operation, and no business had gone through it.  It further had no account of its own.  P2 could have suffered no damage or harm from her setting up of the same.

M.3. My findings

184.  I accept that the Branch Office had been set up by D2 and D3.  I find that P1 had no contemporaneous knowledge of the same.  Ps otherwise have not adduced any evidence in relation to its purpose, operation, or any loss which Ps might have suffered as a result.  There is no evidence contradicting D3’s evidence that the Branch Office had carried out no operation, that no business had gone through it, that it had no account of its own, and that P2 could have suffered no damage or harm from her setting up of the same.

N. The Appropriation of Funds

185.  In summary, Ps’ claim is that D2, assisted by Chen QJ, misappropriated funds from P2 by causing it to pay or reimburse him various expenses which he was not entitled to under his employment contract or not supported by any valid invoices/receipts[134]. Those items which P2 is still pursuing (the “Disputed Sums”) are:

	Description	Amount (RMB)
1	Subsidy of travelling expenses	32,000.00
2	Subsidy of telephone expenses	13,500.00
3	Healthcare subsidy	96,745.00
4	Healthcare expenses	467.00
5	Private car usage expenses	12,000.00
6	Expert fees	45,000.00
7	Working subsidy	192,501.00
8	Expenses of education fees[135]	102,883.00
		495,096.00

N.1. Evidence adduced by Ps

186.  Dr Tam in Tam/WS1[136] said that D2 was entitled to a monthly salary and some allowance under his employment contract with P2, and that none of the Disputed Sums had been authorized by P1 or P2.

187.  In Wong/WS1:

(a) Wong referred to a Chinese labour agreement[137] between P2 and D2 (the “Labour Agreement”);

(b) The Labour Agreement was not dated.  According to Clause 4 thereof, D2’s monthly salary was RMB 40,000.  Clauses 12.2, 12.3 and 12.4[138] provided that:

「 2. [P2]應為[D2]和家人購買商業醫療保險。

3. [D2]可享受以實報實銷形式取得的住房補貼。

4. [D2]可享受以實報實銷形式取得的語言培訓費和子女教育費補貼。」

(c) Wong said that upon removal of D2 from his office, an audit was conducted in respect of the salaries and various reimbursement that P2 had paid to D2;

(d) In respect of Items 1, 2, 4 and 7 of the Disputed Sums set out above, Wong said that D2 was not entitled to claim them.  In respect of Items 5 and 6, Wong said that D2 had failed to provide any receipts or invoices in support of his claims.  In respect of Item 8, Wong said that D2 had, out of the total of RMB 770,003 Education Fees paid, failed to provide receipts or invoices in support of his claim for the sum of RMB 102,883.  In respect of Item 3, Wong did not make clear whether D2 was not entitled to the same, or that he had failed to provide any invoices or receipts in support. 

N.2. Evidence adduced by Ds

188.  In D2/WS1, D2 said[139] that as a foreign employee, he was entitled to reimbursements for his children’s education, housing and subsidies.  He said that the Disputed Sums were all legitimate expenses that he was entitled to claim.

189.  In D2/WS2, D2 referred to his employment contract with P2.  He produced them as “CWS-2”.  I said “them” because within “CWS-2” were two documents.  One of them was the Labour Agreement.  The other one was in English entitled “Employment Agreement For An Executive”[140] (the “Employment Agreement”).  It was dated 30 August 2013.  D2 said that:

“ My Contract clearly states that, as part of my compensation package for relocating to China, I am entitled to be compensated for my expenses …”

190.  I note that according to the Employment Agreement, D2’s annual salary was RMB 1,250,000.

191.  In Chen QJ/WS, Chen QJ said the Disputed Sums were pre-approved expenses that D2 was entitled to claim by way of expenses:

(a) she pointed to the 2014 Budget Table[141]. It shows that:

(i) D2’s monthly salary was RMB 104,166.67;

(ii) D2 was entitled to telephone subsidies;

(iii) there was budget planned for healthcare insurance for foreign staff and transportation costs;

(b) she said that as for the education fees of D2’s children and working subsidy, those were in fact part and parcel of D2’s salary.  She said further[142] that as a matter of tax planning, P2 agreed that D2’s salary would be broken down into parts by way of child education, healthcare and working subsidies;

(c) in respect of the Private car usage expenses, she said[143] that as the 7-seater vehicle originally planned to be purchased was subsequently not bought, P2 promised to reimburse D2 RMB 4,000 a month as subsidy for him;

(d) As to the Expert Fees, she said[144] that they were spent for honorarium to experts engaged to address questions raised during the inspection conducted by the government on 7 August 2014 to approve P2 as a qualified laboratory.

192.  In my view, there is a clear ring of truth in Chen QJ’s evidence in this regard.  In particular, I point to the 2014 Budget Table.  I reiterate the fact that the emails attaching the same were copied to inter alios Dr Tam and Wong.  It shows that D2’s monthly salary was RMB 104,166.67.  That was not RMB 40,000 as set out in the Labour Agreement which Wong for P2 relied on.  As explained by Chen QJ when under cross-examination, the sum of RMB 104,166.67 was reached by dividing RMB 1,250,000 (D2’s annual salary as set out in the Employment Agreement) with 12.  The figures tally precisely.

N.3. My findings

193.  For the reasons set out above, I accept Chen QJ’s evidence in this regard (as summarized above), and find accordingly.

O. The 2 overarching claims

194.  With the above findings in mind, I come back to the 2 overarching claims of Conspiracy to Defraud and Breach of Fiduciary Duties.  I will deal with the claim based on Breach of Fiduciary Duties first.  As whether a conspiracy exists is a matter of inference, I will come back to it at the very end.

O.1. Breach of Fiduciary Duties

O.1.a. Whether fiduciary duties owed

195.  D2 was the General Manager and a director of P2.  D3 was the Legal Representative and the President of P2.  P2 claims[145] that as such, they owed P2 an implied duty of fidelity and/or fiduciary duties to act in good faith and in the best interest of P2, not to misappropriate the money of P2, not to make secret profit from the use of P2’s assets, not to commit fraud or deceit against P2, and not to conspire with others to injure P2’s interest.

196.  Ds admit that those duties were owed to P2[146].

197.  That admission is clearly correct, and I so find.

198.  P1 claims that that D2 and D3 also owed it similar fiduciary duties[147]. It avers that P1 depended on and trusted their expertise and experience in setting up and operating an ICL in the Mainland, and that it was for that purpose that they were appointed as the senior management of P2, so that they were in effect P1’s consultant.

199.  For the same reasons as I have stated above in relation to Ps’ Breach of Fiduciary Duties Claim at Stage I, I reject P1’s case that D2 or D3 owed it any fiduciary duties.

O.1.b. Whether any breach of duties owed to P2

200.  I next consider whether D2 or D3 has breached any of the fiduciary and fidelity duties they owed to P2.

O.1.b.i. The 1^st LIS Contract

201.  P2’s pleaded claim[148] in relation to the 1^st LIS Contract is a simple one, that:

(a) during the P2 15/1/2014 Board Meeting, D2 sought and obtained approval from P2’s Board to engage中軟to develop the LIS at about RMB 900,000;

(b) it turned out that P2 entered into the 1^st LIS Contract with Wu Fan at more than double that price;

(c) the 1^st LIS Contract was therefore unauthorized;

(d) P2 suffered a loss of RMB 1,050,000.

202.  P2’s claim in this regard represents in my view an over-simplified presentation of the facts.

203.  To start with, the P2 15/1/2014 Minutes record the sum of RMB 2 million. There is no record of the sum of RMB 900,000.

204.  There is no reliable evidence as to what was actually discussed during the P2 15/1/2014 Board Meeting.  There is further no reliable evidence showing what the “整個IT工程” was meant to refer to or comprise of.

205.  The sum of RMB 1,950,000 was referred to openly in the 2014 Budget Table and the Baigao 3-Year P&L and Cash Flow Analysis.  The former document was prepared by D2.  It was sent to Hau, copied to inter alios Dr Tam and Wong.  Hau commented on it.  His comments were also copied to Dr Tam and Wong.  The latter document was sent by D2 to Au, and copied inter alios to Dr Tam.

206.  Such open reference to the sum of RMB 1,950,000 is not consistent with the case pleaded by P2.  It is clearly not consistent with any fraud.

207.  P2 in fact did not execute the 1^st LIS Contract.

208.  There is no evidence that any sum has been paid by P2 to Wu Fan under the 1^st LIS Contract.

209.  In my view, P2’s claim based on the 1^st LIS Contract is not made out on the evidence.

O.1.b.ii. The 2^nd and 3^rd LIS Contracts

210.  P2’s pleaded case[149] based on the 2^nd and 3^rd LIS Contracts proceeds as follows:

(a) D3 caused P2 to enter with D1 the 2^nd and 3^rd LIS Contracts for the same LIS system at the price of RMB 2,765,000;

(b) D1 has been paid that sum;

(c) both contracts were a sham in that (i) it was Wu Fan who was the person commissioned to develop the LIS but not D1; and

(d) no LIS was ever developed and set up by D1 for P2;

(e) P2 has therefore suffered loss.

211.  D1 was not a software house.  It should have had no business in the development of the LIS.

212.  Ds admitted[150] that the 2^nd and 3^rd LIS Contracts were signed between P2 and D1.

213.  D1 has indeed been paid RMB 2,765,000.

214.  Ds claimed that those contracts were approved by, inter alios, Dr Tam and Au[151], and that “it cannot be said that the 2^nd and 3^rd LIS Contracts were 24/2/2014 Contract [sic.] without [P1’s] approval and such allegations are denied”.

215.  I accept Dr Tam’s evidence that he had not approved the 3^rd LIS Contract.

216.  Au could never have approved the LIS Contracts.  D2 said that he got that wrong there.  But that paragraph remains there and has not been amended.

217.  I do not understand what is meant by “it cannot be said that the 2^nd and 3^rd LIS Contracts were … without [P1’s] approval and such allegations are denied”.  In any event, I find Ds’ case based on Dr Tam’s, or Au’s, or P1’s approval not made out.

218.  I have expressed my view above on the highly unsatisfactory state of the evidence adduced by D2 and D3 in this regard.  The Alleged Back-to-Back LIS Arrangements asserted by D2, D3 and Chen QJ in the course of their evidence is unpleaded, and was mentioned for the first time when they gave evidence in court.  I do not accept the same.

219.  I have also made observations above that the sums specified in the 1^st LIS Contract and the 2^nd/3^rd LIS Contracts do not tally.  I reject the assertions by D2 and D3 that the difference of about RMB 810,000 were used towards payment of some other sums for which no invoices were or could be issued.  As I have observed above, the assertions lack particulars, are not in their witness statements, and are not supported by any documentary proof.

220.  I have considered also the less than satisfactory state of the evidence adduced by Ps under this claim.  But given the discussions above, and in particular the intervention of D1 which ought to have had no business in the development of the LIS, my rejection of the Alleged Back-to-Back LIS Arrangements, and in the absence of any other pleaded defence, I find on balance that this aspect of P2’s case has been established.  I find that what was done was not in good faith and/or in the best interest of P2.

221.  In reaching the above conclusion, I have considered the submissions made by Mr Chan, in reliance upon Re Smith & Fawcett Ltd [1942] Ch 304 at 306 and Regentcrest Plc v Cohen [2001] BCC 494 at [120], that the duty is to act what the director believes, not what the court believes, to be the interests of the company, and that the test is a subjective one.  As observed by Jonathan Parker J in Regentcrest at [120]:

“ The duty imposed on directors to act bona fide in the interests of the company is a subjective one (see Palmer’s Company Law (Sweet & Maxwell), para. 8.508). The question is not whether, viewed objectively by the court, the particular act or omission which is challenged was in fact in the interests of the company; still less is the question whether the court, had it been in the position of the director at the relevant time, might have acted differently. Rather, the question is whether the director honestly believed that his act or omission was in the interests of the company. The issue is as to the director’s state of mind. No doubt, where it is clear that the act or omission under challenge resulted in substantial detriment to the company, the director will have a harder task persuading the court that he honestly believed it to be in the company’s interest; but that does not detract from the subjective nature of the test.”

222.  However, Ds have not pleaded the reasons why the 2^nd and 3^rd LIS Contracts were entered into, have not pleaded any facts in support of the Alleged Back-to-Back LIS Arrangements, and have not pleaded any defence that they subjectively believed that the entering into of the 2^nd and 3^rd LIS Contracts was in the interests of P2.  In the absence of such pleas, and having rejected Ds’ relevant evidence in relation to the Alleged Back-to-Back LIS Arrangements, I hold that the evidence supports the conclusion that D2 and D3 did not subjectively believe that the entering into the 2^nd and 3^rd LIS Contracts and the payment of the sum of RMB 2,765,000 was in the interests of P2. 

223.  D2 was D1’s Chief Executive Officer.  I accept P2’s case that D1 must have received the sum of RMB 2,765,000 with knowledge of D2’s and D3’s breach of fiduciary duties.

224.  The question remains whether, as Mr Chan has submitted[152]:

“ 105. … even if there was a breach of fiduciary duty, the quantum should be reduced taking into consideration of the fact that a functional LIS system was delivered, and that [P2] would have had to pay 1,950,000 in any event.

…

108. As aforementioned, it is Ds’ case that [D1] paid RMB 1,950,000 to Wu Fan in cash in HK as payment for the development of the LIS system, see [D3’s] evidence …

109. It is submitted that such sum was limitedly incurred for the benefit of [P2]. [P2] did as a matter of fact enjoyed the benefit of the LIS system delivered by Wu Fan.”

225.  I have found that a LIS system, albeit not fully functional, had in fact been delivered.  Computer hardware, which was functional, had in fact been acquired.

226.  However, it is not part of Ds’ pleaded defence that part of the sum of RMB 2,765,000 paid to it had been paid to Wu Fan, or towards the acquisition of any hardware.  On the state of Ds’ pleaded defence, the issue of deduction has not been raised, and is not engaged.  I have in any event also rejected the relevant evidence from D2, D3 and Chen QJ. 

227.  I refuse to make any deduction.

P. The Sulong Agency Agreement

228.  I repeat my observation above that it forms no part of Ps’ pleaded case in this regard that Ds were in position of conflict or engaging in self-dealing because Sulong was related to Ds, or because of any position which D3 held with Sulong.  To the extent of P2 now seeking to establish breach by D2 and D3 on that basis, which Ms Siu does in her closing submission, I do not allow and reject the same.

229.  On the face of the Sulong Agency Agreement, it was for the legitimate purpose of promoting and developing P2’s diagnostic services in the Mainland. 

230.  Wong accepted that it was a valid agreement despite the fact that it had not expressly been authorized at the board level.

231.  Given the stated purpose of the Sulong Agency Agreement, I accept that it was within the authorities of D2 and D3 to cause P2 to enter into the same, even in the absence of any specific authority at the board level.

232.  Clause三1. of the Sulong Agency Agreement stipulated that Sulong was to charge as its service fees a percentage of P2’s income.

233.  P2’s case is in effect based solely on the agreed method of charging fees, and that during the period from October 2014 to March 2015, P2 did not conduct any business and had no income.

234.  P2 was not able to prove that Sulong had not provided any service to P2.  In fact, as stated by Guo, she only discovered about the Sulong Agency Agreement after the removal of D2 and D3 and after she had been appointed the Deputy General Manager and Legal Representative of P2.

235.  In effect, P2’s case is that even if services had been provided by Sulong, they were not “chargeable services”[153] under the Sulong Agency Agreement[154].

236.  I find it relevant that as revealed by Guo[155], the Sulong Payments were supported variably by accounting documents (ie payment request forms, reimbursement claim forms, voucher and invoices).

237.  There is no suggestion that those accounting documents were forgeries.

238.  I remind myself that the subjective nature of the test which I am required to apply — see Re Smith & Fawcett Ltd and Regentcrest.

239.  I note also the issues raised by §56A and §57(iii) of the ADef, where it was pleaded that:

“ 56A. Sulong did render valuable services to [P2] by promoting and circulating [P2’s] business and services to local hospitals and potential clients …

…

57(iii.)  the Defendant avers that Sulong did provide services and [Ps] are put to strict proof thereof.”

240.  The question boils down to this: in the absence of any evidence showing that Sulong had not provided services in promotion of P2’s business, whether it can be concluded that by authorizing payment despite Clause三1. of the Sulong Agency Agreement, D2 and D3 did not subjectively believe that what they did was in the interests of P2.

241.  Having considered the evidence in the round, my conclusion is that this Court cannot. 

242.  For the above reasons, I find that P2 has failed to establish any breach of fiduciary or fidelity duties on the part of D2 or D3 in respect of the Sulong Agency Agreement.

Q. The Secret Branch Office

243.  Based on my findings above, which I repeat, it is my view that P2 has failed to establish any breach of fiduciary or fidelity duties on the part of D2 or D3 in respect of the Secret Branch Office.

R. The Misappropriation of Funds

244.  Based on my findings above, which I repeat, it is my view that P2 has failed to establish any breach of fiduciary or fidelity duties on the part of D2 or D3 in respect of the Misappropriation of Funds.

S. Conclusion on the Breach of Fiduciary Duties Claim at Stage II

245.  For the reasons set out above, I allow only the part of P2’s claim in respect of the 2^nd and 3^rd LIS Contracts.  I dismiss the balance.

T. The Conspiracy to Defraud Claim

246.  I have considered Ms Siu’s submissions in relation to the elements that Ps will have to prove.  They are not disputed by Mr Chan.

247.  I accept Mr Chan’s submissions that the Conspiracy to Defraud Claim, being a plea of fraud, has to be pleaded with the utmost particularity — see Aktieselskabet Dansk Skibsfinansiering v Wheelock Marden & Co Ltd & Ors [1994] 2 HKC 264 at 270, where Bokhary JA (as he then was) explained that:

“ What pleadings must do — generally …

… [T]he things which properly particularized pleadings must do are to:

(1) inform the other side of the nature of the case they have to meet as distinguished from the mode in which that case is to be proved;

(2) prevent the other side from being taken by surprise at the trial;

(3) enable the other side to know what evidence they ought to be prepared with and to prepare for trial;

(4) limit the generality of the pleadings, the claim and the evidence;

(5) limit and define the issues to be tried, and as to which discovery is required; and

(6) tie the hands of the party so that he cannot without leave go into any matters not included (although if the opponent omits to ask for particulars, evidence may be given which supports any material allegation in the pleadings).

… and especially where fraud is alleged

To the generality of the foregoing must be added the special rule that allegations of fraud must be pleaded distinctly and with the utmost particularity.  The word ‘distinctly’ is the one used by Thesiger LJ in his well-known statement in Davy v Garrett (1878) 7 Ch D 473 at p 489 as to how fraud is to be pleaded. And the expression ‘utmost particularity’, as one sees from note 18/8/8 at p 297 of Vol 1 of the 1993 Supreme Court Practice, is the one chosen by its learned editors and has the authority of their combined experience.”

248.  The plea of Conspiracy to Defraud lacks particulars.

249.  In any event, on the evidence before me, and in the light of my discussions above on the 1^st LIS Contract, the Sulong Payments, the Secret Branch Office, and the Misappropriation of Funds, and despite my findings on the 2^nd and 3^rd LIS Contracts, I am of the view that no adverse inference against D2, D3 and Chen QJ can be drawn that they were members of a conspiracy, or that what they did in respect of those 4 matters were done pursuant to a conspiracy. 

250.  I dismiss Ps’ Conspiracy to Defraud Claim.

U. Quantum

251.  In respect of the LIS Contracts, and for the reasons set out above, I assess the quantum at RMB 2,765,000, or the Hong Kong dollar equivalent of HK$3,448,060.86.

252.  I make in favour of P2:

(a) in terms of §(4) of the prayer against D1, a declaration that D1 is liable to account as a constructive trustee of that sum of HK$3,448,060.86 on the ground of knowing receipt of money paid in breach of D2 and D3’s breach of fiduciary duties, and order to repay P2 the same;

(b) in terms of §(4) of the prayer against D2, an order that D2 do pay P2 that sum of HK$3,448,060.86; and

(c) in terms of §(2) of the prayer against D3, an order that D3 do pay P2 that sum of HK$3,448,060.86.

253.  The liabilities are joint and several.

254.  I make an interest order nisi that the judgment sum in favor of P2 shall carry interest at commercial rate of prime plus 1% from the date of the service of the Writ until the date of the Judgment herein, and thereafter until payment at judgment rate.

V. Costs

255.  I have dismissed all of P1’s claim.  I grant judgment in favor of P2 one limb of its Breach of Fiduciary Duties Claim at Stage II based on the 2^nd and 3^rd LIS Contracts.  Notionally, Ds may have the costs of their defence of P1’s claims against them, but have to bear part of the costs of P2’s claims against them.  Rather than to engage in an expensive set of taxation proceedings, I make a costs order nisi that in respect of the entire action (but without prejudice to any costs order that have previously been made), Ds’ share bears 30% of Ps’ costs.  Any party who seeks variation of the same (including the interest order nisi) may file submissions within 21 days hereof, submissions in response within 14 days of receipt, and submissions in reply within 7 days thereafter.  Unless otherwise directed, any variation of the costs may be dealt with on the papers.