JEFFERY EDWARD WELCH AND ANOTHER v. JOHN G. COOPER AND ANOTHER

DCCJ3498/2006

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO. 3498 OF 2006

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JUDGMENT

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1.  The plaintiffs sue the defendants for misrepresentation, seeking damages and repayment of a sum of HK$540,000 which the plaintiffs paid to the defendants for the purpose of running a wine bar between them.  The current application is an O.14 application by the plaintiffs for summary judgment to be entered in respect of the sum of HK$540,000.

2.  The plaintiffs and the 1^st defendant (D1) are American citizens who have come and remained in Hong Kong either for business or for studies.  The 2^nd defendant (D2) is apparently a Chinese lady who engages in business activities in Hong Kong.

3.  The 1^st plaintiff (P1) was the assistant manager and a member of the teaching staff of an English learning institute in Mongkok.  P1 came to know P2 in September 2003.  In March 2005 P1 came to know D1 when they both worked as the teaching staff of the same English learning institute.

4.  According to P1, sometime in March 2006 the defendants made oral and written representations to him about the profitability of running a wine bar in Lan Kwai Fong of Central.  The defendants proposed to run a joint venture with P1 for the purpose of running the “SOFA Bar”.  P1 related the defendants’ investment plan to P2. The defendants took the plaintiffs to see the “SOFA Bar”.

5.  The “SOFA Bar” was situated at No. 14 Wo On Lane in Lan Kwai Fong and was managed and run by a company known as “Island Best Investments Limited” which was apparently controlled by a person known as Michael Sean.

6.  P1 and P2 discussed about the investment proposal of the defendants.  P2 felt interested and ultimately joined the wine bar investment proposed by the defendants.

7.  During the meetings in March 2006 the defendants had prepared and shown the plaintiffs a business plan on the estimated items of expenses required in the running of the wine bar for the purpose of calculating the anticipated financial contribution from the participants.

8.  After negotiation, the parties agreed the amount of capital contribution was a sum of HK$1.08 millions, of which the plaintiffs and the defendants would be contributing in equal proportion to the HK$1.08 millions.

9.  Acting on the defendants’ representations, on 27 March 2006 the plaintiffs signed a homemade agreement termed “shareholder agreement in respect of the Joint Venture business of Island Best Investments Limited” (“the Agreement”) with the defendants.  In the Agreement the plaintiffs and the defendants were named the 4 contracting parties.  The 4 contracting parties were required to contribute towards the sum total of HK$1.08 millions. The rental and utilities deposits were set out in the Business Plan of 23 March 2006.

10.  Pursuant to the Agreement, the plaintiffs paid the sum of HK$540,000 by way of a cashier order for HK$528,000 drawn in favour of Le Nobles Group Limited on 27 March 2006 and cash HK$12,000.

11.  It was not in dispute that P1 and P2 were registered as the directors of Island Best Investments Limited on 11 April 2006.

12.  Problems on the running of the wine bar began to surface in May 2006 when the parties made allegations against each other about the incurring of inappropriate expenses.  The plaintiffs suggested D2 has charged the wine bar decoration fees for items on which no renovation work had been carried out.  D2 suggested the plaintiffs were the directors responsible for the day-to-day running of the wine bar but the recorded income of the wine bar did not tally with the financial intake of the wine bar.

13.  Parties came to loggerheads.  Their differences could not be resolved.  On 2 June 2006 the plaintiffs resigned from their directorship with Island Best Investments Limited.  On 17 July 2006 the plaintiffs brought this action to seek recovery of their financial contribution in this wine bar joint venture investment.

14.  The plaintiffs framed their action in misrepresentation.  It was the plaintiffs’ case that the defendants made a number of false representations in inducing the plaintiffs to participate in this joint venture investment.  The false representations, as contended by the plaintiffs and set out in paragraph 6 of the Statement of Claims, were:-

(i)    the 1^st and 2^nd defendants, at all material times, did not believe that there was a profitable and sound alleged HK$1.08 million investment as alleged or at all;

(ii)    the 1^st and 2^nd defendants, at all material times, did not believe that a total of HK$1,080,000 was required for the alleged HK$1.08 million investment;

(iii)    the 1^st and 2^nd defendants were not ready, willing or able to invest a sum of HK$1,080,000 in the alleged HK$1.08 million investment on their part;

(iv)    the 1^st and 2^nd defendants were not in a position to sell half of the equity of the alleged HK$1.08 million investment to the 1^st and 2^nd plaintiff as alleged or at all; and

(v)    the 1^st and 2^nd defendants, at all material times, had no intention to enable the 1^st and 2^nd plaintiffs to participate in the daily management and control of the alleged HK$1.08 million investment.

15.  The affirmation and the documents exhibited for the purpose of this O.14 application showed the following events took place:-

(i)    On the same day that the plaintiffs and the defendants signed the “shareholder agreement” (i.e. 27 March 2006), a transfer of business agreement was signed between Michael Sean of Island Best Investments Limited and D1 for the transfer of business of “SOFA Bar” and the transfer of the shares of Island Best Investments Limited at a consideration of HK$550,000.  The transfer fees was inclusive of 3 months rental deposit paid in respect of the wine bar premises in Lan Kwai Fong.

(ii)    The Business Registration documents showed D1 and D2 set up a partnership between themselves in the name of “level 2 Bar” with its trading address registered as no. 14 Wo On Lane, Central on 7 April 2006.

(iii)    Sometime in April 2006 P1 and P2 had been added as the authorized signatories to the accounts of “Level 2” with the Bank of China.

16.  It is never the correct approach for the Court to hold a mini-trial on affidavits when parties were seeking factual findings from the Court about events on which only tested evidence could reveal the truth.

17.  With all the cross allegations it is totally inappropriate for the plaintiffs to seek an O.14 application when both parties have given different accounts on the factual occurrence of the events.

18.  Nonetheless the business transfer agreement of 27 March 2006 (the agreement signed between Island Best Investments Limited and D1) clearly showed the rental deposits have all along been included in the business transfer fees of HK$55,000. Yet in the business plan for calculation of the capital contribution of the 4 participating parties, the defendants included a rental deposit of HK$232,000 as a separate head of expense in addition to the business transfer fee of HK$580,000 (or HK$550,000 as ultimately agreed in the agreement between D1 and Island Best Investments Limited on 27 March 2006).

19.  The plaintiffs had pointed out the misrepresentation about the need of the payment of a rental deposit in the business plan (Para 16 of P1’s second affirmation of 27 Oct 2006), yet the defendants never see fit to deal with this aspect of the plaintiffs’ factual contention.

20.  Falling short of a credible explanation from the defendants, on the face of the document, this constituted a plain misrepresentation about the need of an item of expense in the transfer fees.

21.  I do not accept the suggested entire agreement clause at clause 5.04 of the shareholder agreement of 27 March 2006 could have exempted the defendants from their liability of misrepresentation.

Order

22.  As the case hinges upon an issue of credibility of the witnesses on their factual contentions, this is an inappropriate case for summary judgment to be granted for the entire sum of HK$540,000.

23.  Nevertheless, falling short of a credible explanation from the defendants about the representation of the need of a rental deposit payment, the papers showed a strong case of misrepresentation on the necessity of a rental deposit of HK$232,000.

24.  I grant conditional leave for the defendants to defend the plaintiffs’ action on payment of a sum of HK$116,000 (being ½ contribution of the rental deposit of HK$232,000) into court within 21 days.  Should the defendants default payment of the sum of HK$116,000 within 21 days from the day of the order, leave is granted to the plaintiffs to enter judgment in respect of the sum of HK$116,000 with leave granted to the defendants to defend the balance of the plaintiffs’ claim.

25.  As agreed between the parties, costs of this application would be costs in the cause of the action.