CHOW HOW YEEN MARGARET AND OTHERS v. WEX PHARMACEUTICALS INC. AND ANOTHER

HCA 537/2013

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 537 OF 2013

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J U D G M E N T

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A. INTRODUCTION

1.  The Defendants represented to the Plaintiffs that they had ownership of a patent to manufacture a drug.  They lost the ownership in PRC proceedings before the 1^st Plaintiff (through a nominee company) entered into a distribution agreement and before the Plaintiffs started purchasing shares of the 1^st Defendant pursuant to a share agreement.  The distribution agreement was never performed.  The share price dropped when the loss of ownership of the patent was announced some years after the loss.

2.  The Plaintiffs sue for loss in the value of the shares, basing their claim on the Defendants’ fraudulent misrepresentation.  The Defendants deny the claim and assert that it was time-barred.  The Plaintiffs contend that the limitation time has been extended because of the Defendants’ deliberate concealment of the fraud from the Plaintiffs.

B.  THE UNDISPUTED FACTS

3.  The 1^st Plaintiff (“Ms Chow”) is a 50% shareholder and one of 2 directors of the 2^nd and 3^rd Plaintiffs (“GCXL” and “Muscular” respectively).

4.  The 1^st Defendant (“WEX”) is a company incorporated under the federal laws of Canada and had been a listed company in Canada until it was privatized in 2011.

5.  The 2^nd Defendant (“WEX HK”) was incorporated in Hong Kong and is a wholly owned subsidiary of WEX.

6.  Nanning Maple Leaf Pharmaceutical Company Limited (“Nanning”) was incorporated in Mainland China.  It was a subsidiary of WEX. 

7.  WEX and its subsidiaries were engaged in, amongst others, the manufacture and commercialization of Tetrodin for treatment of drug withdrawal from all opiate addition.  Tetrodin contained a substance called TTX.  The use of TTX for the aforesaid purpose was protected by the subject patent (“the China Patent”).  Nanning manufactured all of WEX’s TTX in Nanning, PRC.

8.  Mr Shum Hay Kong Frank (“Mr Shum”) was:

(a)   The President and CEO of WEX until 16 August 2005, and a director until 26 January 2006;

(b)   The CEO, Chairman and a Director of WEX HK until 2 December 2005;

(c)   The Chairman and legal representative of Nanning.

9.  Grace was Mr Shum’s assistant.  She was also the Director of Business Development of WEX and a Director and Deputy Manager of WEX HK.  As Mr Shum did not speak English, she had been his interpreter in all the meetings that Mr Shum held with Ms Chow.

10.  Pursuant to discussions with Mr Shum, Ms Chow and her business partner (“Mr Ma”) acquired rights to sell Tetrodin in Peru for 6 years from the date of signing of a distribution agreement.  The parties to the distribution agreement were Winland Enterprises Group Inc (“Winland”) nominated by Ms Chow, and a subsidiary of WEX known as GlobalMed Corp of Infinitrust Bank & Trust with an address in Grenada (“GlobalMed”).

11.  A total of 3 Distribution Agreements (“the Distribution Agreements”) had been entered into, one after another:

(a)   The 1^st GlobalMed Agreement dated 12 November 2001;

(b)   The 2^nd GlobalMed Agreement dated 5 December 2001, at the request of Mr Shum, to replace the 1^st; and

(c)   The Acro Pharm Agreement dated 21 May 2003 which replaced the 1st GlobalMed Agreement on the same terms.

None of these Agreements had been performed by GlobalMed/ Acro Pharm.

12.  In the course of their discussions, Mr Shum represented, amongst others, to Ms Chow that Nanning owned the China Patent (“the CP Representation”). Nanning would manufacture Tetrodin from the Nanning manufacturing facility.  WEX HK owned the exclusive distribution rights for Tetrodin, was in a position to grant the exclusive distributorship for Tetrodin for drug abstinence in every country except PRC, Hong Kong and Canada and could grant that exclusive distribution right in Peru to Ms Chow and Mr Ma.  Mr Shum also said that he was a director of, amongst others, GlobalMed, and that he was authorized by WEX and GlobalMed to sign all their agreements with Winland.  Ms Chow was told that exclusive distribution rights would be granted for 6 years from the date of signing the Distribution Agreement with GlobalMed.

13.  It transpired that since March 1995, Nanning had been engaged in litigation (“the CP Litigation”) with the People’s Liberation Army Institute of Pharmaceutical Chemistry (“the PLA”), Qiu and Pan over the ownership of the China Patent. 

14.  On 22 January 2000, the State Intellectual Property Office of the PRC (“SIPO”) registered Nanning as the owner of the China Patent.

15.  On 19 March 2000, the PRC Court held that Nanning was not the qualified applicant of the China Patent.  An appeal against the judgment was dismissed on 27 November 2001 (“the Final Judgment”).

16.  The Final Judgment held, amongst others, that:

“Assigning the right to apply for the patent of the invention to [Nanning] by [Pan] and [Qiu] in the absence of any consent obtained from the [PLA] was an invalid legal act, and the agreement on such assignment had no legal force”. [Nanning] was not a qualified applicant of the China Patent.”

17.  On 22 November 2002, SIPO changed the name of the registered owner of the China Patent from Nanning to PLA and Qiu (“SIPO’s Decision”).

18.  Nanning’s Administrative Action between 2003 and 2004 to challenge SIPO’s Decision failed both at first instance in 2003 and on appeal.  Nanning’s petition for retrial of the Administrative Action was dismissed on 15 March 2005 by the Beijing Higher People’s Court.

19.  WEX publicly announced the loss of the China Patent on 29 June 2005 (“the 2005 Announcement”), 3½ years after the Final Judgment.

C.  THE PARTIES’ RESPECTIVE CASE

20.  There were 2 sets of alleged fraudulent misrepresentation – as to the CP Representation and as to the existence of GlobalMed (“the GlobalMed Representation”). 

21.  Ms Chow claimed that she was induced by the fraudulent misrepresentations to enter into the Distribution Agreements and a Share Agreement.  Under the Share Agreement, Mr Shum promised to give her the distribution rights in Peru for free on condition that she/Mr Ma purchased a minimum of 50,000 shares of WEX per year, and the shares would be locked up for 12 months from the date of their issue. 

22.  However, Mr Shum knew that WEX had lost the China Patent by the time of the Final Judgment or SIPO’s Decision (at the latest) and that loss was fraudulently concealed from her.

23.  Meanwhile, (beginning 3 days after the Final Judgment), Ms Chow/Mr Ma had started to purchase WEX’s shares through private placements, tabulated below:

Table A

Date Paid	Date Issued	Placee	Certificate Number	Shares Purchased	Unit Price (C$)	Amount Paid (C$)
30-Nov-01	18-Dec-01	Red Robin	Unknown	30,000	2.05	61,500.00
Unknown	18-Dec-01	Asian World	1084	20,000	2.05	41,000.00
Unknown	10-Dec-02	Chow	Unknown	50,000	1.90	95,000.00
Unknown	10-Dec-02	Chow	1478	55,000 5,000	1.90	104,500.00 9,500.00
Unknown	14-Feb-03	Chow	1520	10,000	2.04	20,400.00
06-Oct-03	6-Nov-03	GCXL	01708-01729	52,500	1.95	102,375.00
23-Oct-03				165,428		322,584.60
Unknown	18-Dec-03	Asian World	1892	20,000	5.00	100,000.00
12-Jan-04	30-Jan-04	Muscular	2103	40,000	5.00	200,000.00
Unknown	30-Jan-04	E-Top	2104	20,000	5.00	100,000.00
09-Sep-04	27-Oct-04	Chow	02501-02520	200,000	2.70	540,000.00
29-Oct-04	Unknown 29-Oct-04	GCXL	2572	217,928	2.30	501,234.40
Total:				830,856		2,093,594.00

(Note: the deleted figures were in the original Statement of Claim.  The grey highlighted items represented shares purchased by the Plaintiffs’ side.)

24.  The share price dropped significantly after the 2005 Announcement and Ms Chow/her companies suffered loss as a result. 

25.  Ms Chow was alerted to a change in status of the China Patent only when a Mr Carey of WEX called her up in April 2010 to terminate the Acro Pharm Agreement.  It was not until 23 September 2011, after some enquiries, that Ms Chow, through PRC lawyers, finally got a notarized copy of the Final Judgment and discovered the loss of the China Patent.

26.  WEX and WEX HK denied that there was fraudulent misrepresentation.  They claimed that Mr Shum honestly believed that despite the Final Judgment, he could still “appeal” and that he had not “lost” until the decision in the appeal in the administrative action.  Ms Chow had not relied on the CP Representation and she bought the shares as investment. WEX/WEX HK also claimed that the Plaintiffs were time barred.  With reasonable diligence, the Plaintiffs could have discovered the misrepresentation in 2005.  With another 12-18 months to make enquiries, the Plaintiffs would have been able to learn the truth by about March 2007. 

D.  THE ISSUES

27.  The issues in this case can be classified as follows:

(1)   Whether Mr Shum had misrepresented facts to Ms Chow;

(2)   Whether the misrepresentation was fraudulent;

(3)   Whether the Share Agreement existed;

(4)   Whether Ms Chow had relied on the representation of Mr Shum;

(5)   Whether Ms Chow knew of the loss of the China Patent;

(6)   Whether with reasonable diligence Ms Chow could have discovered WEX’s loss of the China Patent in 2005;

(7)   The quantum of loss suffered by Ms Chow/her companies.

28.  The issue on agency was, rightly in my view, no longer pursued in the final submission of WEX/WEX HK.  With the positions they held, Mr Shum and Grace clearly had authority to act on behalf of and bind WEX/WEX HK.  WEX HK was clearly the agent of WEX as evidenced by its receipt of the purchase price for the private placements of shares.

E.  CREDIBILITY OF WITNESSES

29.  On the Plaintiffs’ side, Ms Chow and Ms Chan Ching Ching’s evidence was adduced.  On the Defendants’ side, Mr Shum and Grace gave evidence.  The witness statement of Mr Stafford was admitted without calling him, although his evidence was not quite relevant to the issues.

30.  The Plaintiffs’ case depended on facts dating as far back as 15 years.  There were contemporaneous records, except for the alleged Share Agreement. 

31.  Mr Shum and Grace used to be Third Parties.  However, by written agreements, the Defendants had agreed to withdraw the third party proceedings against them upon their agreement to give witness statements on behalf of the Defendants (“the Withdrawal Agreements”).  In ordering specific discovery of the Withdrawal Agreements, I took the view that without the evidence of Mr Shum or Grace, the Defendants would face an uphill fight; thus securing their cooperation was of utmost importance.  If the Plaintiffs were to succeed, damages might be recoverable from Mr Shum and Grace.  As such, those 2 witnesses had a stake in seeing that the Defendants would not lose the case. 

32.  Having heard them give evidence, I maintain my view as to the importance of Mr Shum and Grace as witnesses but there was nothing to persuade me that they had been influenced in any way by the terms of the Withdrawal Agreements when giving evidence. 

33.  Mr Shum was aged over 70 at the time of the trial.  Although he might not recall every detail, I am satisfied that he could remember the major events well. 

F.  LEGAL PRINCIPLES ON FRAUDULENT MISREPRESENTATION

34.  The principles on fraudulent misrepresentation are not in dispute:  Haifa International Finance Co Ltd v Concord Strategic Investments Ltd [2009] 4 HKLRD 29, Cheung JA, §15.

(1)   There must be a representation of fact made by words or conduct.

(2)   The representation must be made with knowledge that it is or may be false. It must be wilfully false, or at least made in the absence of any genuine belief that it is true.

(3)   The representation must be made with the intention that it should be acted upon by the claimant, or by a class of persons which includes the claimant, in the manner which resulted in damage to him.

(4)   It must be proved that the claimant has acted upon the false statement.

(5)   It must be proved that the claimant suffered damage by so doing.

35.  On the question of falsity:

(a)   It is for the plaintiffs to prove that the representations were false.

(b)   When considering whether a representation which is capable of having different meanings was false, one takes as its meaning the way it would have been understood by a reasonable person in the position of the person to whom it was made.

(c)   A representation will not be false simply because it is not entirely correct, provided it is substantially correct, and the difference between what is represented and what is actually correct would not have been likely to induce a reasonable person in the position of the claimant to enter into the contract.

See China Alarm Holdings Acquisitions LLC & anor v Ing Alexander Yim Leung & ors, HCA 503/2012, 24 March 2016, at §§74 and 76, DHCJ Keith.

36.  On the question of mental element required for a claim in fraud, the classic statement is in Derry v Peek (1889) 14 App Cas 337, at p 374, Lord Herschell:

“... fraud is proved when it is shown that a false representation has been made (1) knowingly, (2) without belief in its truth, or (3) recklessly, careless whether it be true or false. Although I have treated the second and third as distinct cases, I think the third is but an instance of the second, for one who makes a statement under such circumstances can have no real belief in the truth of what he states. To prevent a false statement from being fraudulent, there must, I think, always be an honest belief in its truth.”

37.  It is enough to establish that the defendant suspected that his statement might be inaccurate, or that it was false.  Lord Cairns in Reese River Silver Mining Co Ltd v Smith (1869) LR 4 HL 64, §§79-80 expressed the principle as follows:

“...if persons take upon themselves to make assertions as to which they are ignorant whether they are true or untrue, they must, in a civil point of view, be held as responsible as if they had asserted that which they knew to be untrue.”

38.  It is sufficient for the plaintiff to show that the representation was a factor in the plaintiff’s decision and that, but for it, he might (not would)have acted differently: see Raiffeisen Zentralbank Osterreich AG v Royal Bank of Scotland plc [2011] Bus. L. R. D65.

G.  LEGAL PRINCIPLES ON PLEADING FRAUD

39.  Fraud must be distinctly alleged and as distinctly proved.  It is not necessary to use the word “fraud” or “dishonestly” if the facts which make the conduct complained of fraudulent are pleaded; but, if the facts pleaded are consistent with innocence, then it is not open to the court to find fraud.  Where the facts are complicated, it is incumbent upon the pleader to make it clear when dishonesty is alleged. If he uses language which is equivocal, rendering it doubtful whether he is in fact relying on the alleged dishonesty of the transaction, this will be fatal; the allegation of its dishonest nature will not have been pleaded with sufficient clarity. See Haifa International v Concord, following Armitage v Nurse [1998] Ch 241 at 256-257, and Belmont Finance Corporation Ltd v Williams Furniture Ltd [1979] Ch 250, at 268.

H.  PLEADING ISSUES

40.  Mr Carolan (counsel for the Defendants) has submitted that the Plaintiffs have not pleaded various material issues. Mr Remedios (counsel for the Plaintiffs) has clearly demonstrated, and I accept, that Mr Carolan’s submission in this respect was wrong throughout. 

I.  MISREPRESENTATION AS TO OWNERSHIP OF THE CHINESE PATENT

41.  Mr Shum and Grace gave Ms Chow a copy of the China Patent.  In addition, clause 2.1 of the recital to each of the Distribution Agreements stated that GlobalMed or Acro Pharm exclusively distributed, sold and marketed the drug Tetrodin which was protected by patent and related IP and know-how owned and manufactured by WEX, Nanning, WEX HK.  There was no dispute that the CP Representation was true when made.  The question was when it became false.

42.  Both experts agreed that there was no right of appeal against the Final Judgment.  It was a legally effective judgment from the date it was made (or served, the exact date being immaterial in this case). SIPO’s registration was an administrative act.  SIPO was bound to register PLA and Qiu as owners of the China Patent upon application and in accordance with the Final Judgment.

43.  What divided the experts was whether the Final Judgment took effect on its date of issue (Plaintiffs’ case) or the date when SIPO registered the change of owners on 22 November 2002 (Defendants’ case).  I shall call the period in between these 2 dates “the Transitional Period”.

44.  To resolve the difference, it is necessary to analyze Article 10(3) of the PRC Patent Law 2000 and the Guidelines (“GL”) issued thereunder. 

45.  Article 10(3) provides that:

“Where the right to apply for a patent or the patent right is assigned, the parties shall conclude a written contract and register it with the patent administration department under the State Council. The patent administration department under the State Council shall announce the registration. The assignment shall take effect as of the date of registration.” (underline added）

46.  Sub-clause (2) in clause 3.7.2.4 (“GL2”) provides as follows:

“Where the request for a change is submitted due to a right transfer (轉移) as a result of a dispute over the ownership of the right of the applicant or patentee or where the request to make a change is due to the dispute over the eligibility of the inventor, the person requesting a change in the bibliographic data shall submit an agreement of transfer of the right signed or sealed by all the interested parties if the dispute has been settled through negotiations; if the dispute is settled by the People’s Court through judgment, the judgment of the People’s Court which has been taken into effect shall be submitted. The patent office shall, after receiving the judgment inquire the parties concerned whether or not an appeal has been lodged. Where no response is made or no appeal has been lodged within the specified time limit (2 months), the judgment will be effective; where the appeal has been lodged, the parties shall file the Notification of Acceptance of the appeal, the judgment of the original court will not be effective.” (underline added)

47.  Sub-clause (3) in clause 3.7.2.4 (“GL3”) provides as follows:

“If there is a change of right due to assignment (轉讓) of grant of the patent applicant or patentee, the applicant or patentee who request for a change of the patent shall submit the original of the assignment or a grant or notarized copy. If the contract is made by a legal person, that legal representative or authorized person must sign on the contract or seal on the contract and the official seal of the legal person or the seal exclusively used for contract must be sealed too. If necessary, the notarized document has to be submitted. If the contract is made by citizens, the person concerned has to sign and seal the document. If necessary, a notarized document has to be submitted if there are more than one applicant for patent or patentees. The certifying materials of all the parties certifying the grant has to be submitted.”

48.  Clause 3.7.4 provides that:

“The change in the right to apply for a patent shall be taken into effect as of the date of registration, which is the date of issuance of the Notification of Passing Examination on Formalities.”

49.  According to Mr Dong (Defendants’ expert), the courts only resolve the dispute over ownership.  The registration of changing the ownership of the right is determined by SIPO based on the judgment.  The word “assignment” in Article 10(3) means all kinds of transactions.  The Patent Law is a higher-level law than the Guidelines.  Article 10(3) applies to all kinds of transfers (including judgments) and not just assignments. 

50.  On the other hand, Mr Xiong (Plaintiffs’ expert) says that “assignment” is confined to a “buying and selling act” between 2 parties and not judgments (which are public).  A judgment is effective even without SIPO’s registration, whereas an assignment needs to be registered for the public to be informed.  Judgments are covered by GL2.

51.  I prefer the views of Mr Xiong.  The Chinese terms “轉讓” and “轉移” are different.  The former connotes a commercial act whereas the latter can cover broader kinds of situation like a judgment or succession.  A judgment simply does not fall within Article 10(3).

52.  I also accept Mr Xiong’s view that the effect of the Final Judgment was that Nanning was never the owner of the China Patent.  Nanning could not from the date of the Final Judgment lawfully manufacture or sell Tetrodin manufactured at the Nanning Facility for use in the treatment of drug abstinence without reacquiring ownership of the China Patent or obtaining a license from the PLA and Qiu to do so.

53.  Further, Mr Dong accepts that Nanning was only a nominal owner in the Transitional Period:

“Nanning had the nominal right to exploit the China Patent during [the Transitional Period]. However, as the dispute over the ownership of the right to apply for the China Patent was resolved in the Final Judgment, it might be advisable (though not strictly necessary) for Nanning to seek approval from the co-owners of the China Patent after the Final Judgment but before the registration for the change in patent right for exploiting the patent, including manufacturing, selling, offering to sell ... Tetrodonin, or any drug containing TTX in the PRC for the Use, but for sale only by export out of the PRC.”

54.  With respect to Mr Dong, Nanning could not have been a true owner of the China Patent in the Transitional Period when its use of the China Patent was better subject to approval by other entities.  That was why he accepted in cross-examination that Nanning was the owner in name but was not the real owner.  He avoided answering the question of who would have the rights to exploit the China Patent in the Transitional Period by suggesting that PLA was barred by the 2-year limitation from suing Nanning and that Nanning could raise the “anxiety defence” to PLA’s claim.

55.  I find that the Final Judgment took effect on the date of its issue. The falsity of the CP Representation arose on that date.

J.  FRAUDULENT NATURE OF THE MISREPRESENTATION

J(1).   Fraudulent nature of the CP Representation

56.  Dishonesty must be pleaded and proved.  Facts and circumstances which are consistent with negligence or honesty are not sufficient.  FoodCo UK LLP v Henry Boot Development Ltd [2010] EWHC 358 (Ch), Lewison J, at §179.

57.  Falsity of a representation is to be tested by the meaning which the words reasonably conveyed to the representee [ie an objective test].  It is no defence to a charge of falsity that the representor intended the words to convey a different meaning which was true.  But where the inquiry is whether the representation was fraudulent, another test must be applied.  What we are now investigating is not the effect of the words upon the representee, but the state of mind of the representor when he uttered them.  In deciding whether the representation was fraudulent, the question is not whether the representor honestly believed it to be true in the sense assigned to it by the court, or on an objective consideration of its truth or falsity, but whether he honestly believed it to be true in the sense in which he understood it when it was made [ie a subjective test].  There are limitations.  The meaning professed by the representor may be so unreasonable that the court will find that he did not honestly believe it was true in that sense.  But the principle is clear: proof of fraud involves an examination of the representation in the sense in which the representor honestly understood it.  Actionable Misrepresentation, 4^th ed, Spencer Bower,§101, p 60.

58.  If due to a change of circumstances, a representor knows that his previous representation has become false, he has a duty to communicate the truth to the representee before the latter acts on the previous representation. Failure to do so amounts to fraudulent misrepresentation.  FoodCo UK LLP, at §§213-214.

59.  In this case, although the Final Judgment came after the 1^st GlobalMed Agreement, failure of Mr Shum to inform Ms Chow about the loss of the China Patent before the 2^nd GlobalMed Agreement was entered into or before each purchase of shares was made amounted to fraudulent misrepresentation: FoodCo UK LLP.

60.  Mr Shum, however, claimed to have “honestly believed” that right up to March 2005 Nanning owned the China Patent (“the honest belief”).  The honest belief was based on independent legal advice received at the time, and the fact that he still had the right to “appeal” until 15 March 2005.

61.  For the following reasons, I reject the defence of honest belief.

62.  Firstly, Mr Shum was the legal representative in the PRC litigation as stated in the various PRC judgments.  He had clear knowledge of the legal effect of the first instance judgment.  This was evidenced by his 5-page letter to the first instance judge, 10 days before the 1st GlobalMed Agreement was signed.  He stated, amongst others:

“... If a drug patent is not approved by the government for drug manufacture in a certain country, it would be of no value at all. This, too, applies to China. In order to apply for the new drug certificate in China, [Nanning] has spent more than RMB 10 million, and in order to obtain FDA accreditation, it has spent tens of millions of US dollars. Based on the judgment made in the first trial, all these expenditures will be in vain, which is such a huge waste! This is also a fatal blow to [Nanning], which is a Chinese corporation! According to the judgment made in the first trial, [Nanning] is no longer the patentee, which means that it must spend a huge sum of license fee or transfer fee to purchase the patent right or right of use from the three “co-owners”. (underline added)

63.  Secondly, as pleaded, there were 2 pieces of legal advices that WEX/WEX HK relied on (§36(a), (c) & (d) of the re-amended defence):

(a) An advice dated 27 October 2003, but there was nothing in it which supported the plea that SIPO’s Decision “was contrary to the law, would be resolved in Nanning’s favour and that regardless of result, would in no way interfere with Nanning’s business”;

(b) An advice dated 28 June 2005, but there was nothing in it which supported the plea that the PRC High Court ruling “was flawed on the basis that the interests of Qiu and Pan had been assigned to Nanning”.

The pleas were misleading.  The 2 sets of legal advice could not have led Mr Shum to hold the honest belief.

64.  Thirdly, on 11 January 2002, the PLA wrote to Nanning specifically stating that in view of the Final Judgment, the original agreement between Pan and Qiu on the establishment of Nanning for the purpose of the cooperation had become an invalid agreement, and Nanning had lost the patent application right.

65.  Mr Shum testified that he had anticipated that the PLA would apply to change the bibliographic data and remove Nanning as the registered owner. That was why on 24 January 2002, Nanning replied to the PLA confirming receipt of the letter and further stating that “our company will only accept such negotiation carried out before the change of the holder of this patent.”  In my view, Nanning would not have to enter into such negotiation at all if Mr Shum had held the honest belief.

66.  Fourthly, over the years, WEX had been issuing news releases to the public, in discharge of its duty of disclosure as a listed company.  Those news releases included disclosure of the acquisition of the China Patent (2000), the execution of the 2^nd GlobalMed Agreement (2001), and Acro Pharm getting the Sanitary Authorization (2004).  However, none of them mentioned the existence of the CP Litigation or the Administration Action. 

67.  Even the 2005 Announcement was misleading.  It stated thus:

“[WEX] has been notified that based on a court ruling (“the Ruling”)] the Chinese Patent Office (“CPO”) has changed registered ownership of the [China Patent] in China from the Company’s subsidiary, [Nanning] to one of the two inventors and a third party who alleges to have been an employer of the other inventor.

WEX filed an appeal of the Ruling earlier this year and the Court subsequently dismissed the Appeal.”

In fact, WEX had been notified of the court ruling much earlier than 2005 and there was no appeal (whether against the Final Judgment or the decisions in the Administration Action) earlier in 2005.

68.  Fifthly, Mr Shum explained that he did not disclose the loss of the China Patent to Ms Chow because it was not important.  He claimed that the CP Litigation and the Administrative Action were fought for “honour”.  If this were true, he would not have litigated in the PRC for 10 years and expended millions of dollars (as stated in his letter to the first instance judge). 

69.  Sixthly, Jennings Capital, in the process of conducting due diligence in September 2003, discovered that the China Patent was no longer in Nanning’s name.  The issue of whether the loss of the China Patent needed to be disclosed was discussed at the Board meeting on 26 August 2004, which Mr Shum had attended.  Mr Shum knew the duty of disclosure but no news release was issued in that year.

70.  Seventhly, Ms Chow’s contracting party in Peru, Equipos, had obtained the Sanitary Authorization on 24 February 2004, which authorized Equipos to import, market and sell Tetrodin in Peru manufactured only by Nanning for 5 years from 5 February 2004.  This was contrary to Mr Shum’s opinion that it was impossible to obtain authorization without clinical trials.  Mr Shum, acting on behalf of Acro Pharm, congratulated Winland and acknowledged that it was a “big leap forward” for the company. On 29 March 2004, WEX publicly announced the Sanitary Authorization, stating that as a result Tetrodin was ready for sale in Peru.  This statement was not qualified.

71.  And yet Mr Shum still requested for clinical trials in Peru in 2004. WEX was to write the protocol and pay for the Peruvian Trials.  The protocol was never completed.  The Peru Report stated that Tetrodin was not ready to go to the market.  In 2005, Shum even requested that there be a temporary delay to the Acro Pharm Agreement because of WEX’s limited finances.  These 2 requests were clearly delaying tactics of Mr Shum to cover up the loss of the patent.

72.  Mr Shum was aware of a listed company’s duty of disclosure.  However, his conduct in paragraphs 70 and 71 above actively led Ms Chow to believe that the CP Representation continued to hold true.  His conduct was fraudulent and not negligent, proud or stubborn as Mr Carolan submitted.

73.  Grace claimed that she did not know about the CP Litigation until the 2005 Announcement.  She also claimed that she never associated the loss of the China Patent with Nanning being unable to manufacture TTX to be used in the treatment of drug abstinence.  I find it hard to accept that she, being responsible for keeping a record of the patents of WEX, was not told of the loss.  Her version contradicted also Mr Shum’s evidence that everyone in WEX HK knew about the loss. 

74.  Even if I am wrong, Grace’s lack of knowledge of the loss did not affect the outcome of this case as Mr Shum was the real decision maker. 

75.  The fraudulent misrepresentation continued even after the 2005 Announcement. Performance of the Acro Pharm Agreement was suspended since 2006 until it was finally terminated in 2010.  Various reasons were given to Ms Chow but none about the loss of the China Patent. 

76.  Mr Shum would not face the reality that the Acro Pharm Agreement could not be performed.  He testified that WEX/WEX HK could still provide Tectin instead of Tetrodin to Winland, but that was not what Ms Chow bargained for. 

77.  Likewise, Grace suggested that Tetrodin could have been manufactured at other places.  That was contrary to her own Third Party Defence and the condition in the Sanitary Authorization which provided that the drug must be prepared by Nanning.

78.  I find that the misrepresentation as to ownership of the China Patent was fraudulent and reject the defence of honest belief.

J(2).  Fraudulent nature of the GlobalMed Representation

79.  Mr Shum and Grace represented to Ms Chow that GlobalMed was a wholly owned subsidiary of WEX.  The representation was false because there was no record of incorporation of a GlobalMed in Grenada but only one in Turks & Caicos Islands.  Moreover, the sole subscriber and shareholder of the Turks & Caicos company was not WEX, WEX HK or Shum.  Mr Shum was not shown to be a director of any GlobalMed and yet he had signed, amongst others, the 2 GlobalMed Agreements as director.

80.  The letter head of GlobalMed/Grenada showed a logo with elaborate design which would cause a recipient to think that there was such a company.

81.  Mr Shum claimed that he did not understand English and would have signed an English document placed before him (an excuse he would use whenever he came across English documents).  I am unable to accept that a person of his position would have signed documents without understanding them or without being a director.  Even if I am wrong, being a listed company, WEX had permitted itself to use a non-existent foreign company and had not kept proper corporate records. 

82.  I reject Mr Carolan’s submission that there was a mistake in the address as that was never the defendants’ case and there was no evidence that it was a mistake.  He also submitted that the GlobalMed Representation was a red-herring and GlobalMed had been replaced by Acro Pharm. I reject that also because the replacement took place only 2 years after 2 GlobalMed Agreements had been signed.  Taking the fraudulent CP Representation into account, I draw the inference that WEX/WEX HK deliberately used a non-existent company to avoid liability in case they lost in the CP Litigation.  It was fraudulent.

K.  INDUCEMENT

83.  As admitted by Mr Shum and Grace, Ms Chow was told that WEX was always in need of money for development, clinical studies and wanted as many investors as possible.  I also accept Ms Chow’s evidence that Mr Shum told her that WEX was in need of money for the Canadian registration of Tetrodin, to expand the Nanning manufacturing facilities and to pay for salaries of Nanning.  He invited Ms Chow to invest in WEX.

84.  There was a dispute as to whether or not there was a Share Agreement between Ms Chow/Mr Ma and Mr Shum for the former to buy at least 50,000 WEX shares for each of 3 subsequent years.  It was stated in the private placement that purchase of the shares was for investment purposes only and not with a view to resale or distribution.

85.  In stark contrast to the good documentation in relation to the Distribution Agreements, there was nothing in writing (including correspondence) relating to the Share Agreement.

86.  Ms Chow testified that she insisted on signing a distribution agreement and she did sign one before Mr Ma purchased the 1^st batch of shares.  Ms Chow agreed that by then GlobalMed had done all it was required under the Share Agreement; and without anything in writing, WEX would have difficulty in enforcement of the Share Agreement. 

87.  Recital no. 2.4 to the 3 Distribution Agreements provided that:

“in consideration of clause number 2 and all subsequent clauses in this agreement and for other valuable consideration the parties agreed to be bound ...”

88.  Mr Shum agreed that that recital included the purchase of shares, amongst other things (such as Ms Chow/Mr Ma’s contacts in the South American market). Whilst I do not agree with his interpretation of that recital, I accept his evidence (§23 of his witness statement) that WEX decided to enter into the Distribution Agreements because Ms Chow was “financially sound and willing to become a shareholder of WEX”.

89.  There was no dispute that the distribution rights were granted to Winland without a licence fee.  I find that they were in exchange for Ms Chow’s agreement to purchase WEX shares.  I accept Ms Chow’s version to be true.  The Share Agreement existed and was probably made before the 1^st GlobalMed Agreement was entered into.

90.  Grace had authority from Mr Shum to convey messages to Ms Chow from time to time, attaching WEX’s share information, to invite Ms Chow to make private placements.  Grace would say that WEX needed money and that when private placements were made, things would get done quicker, whether in the sense of making arrangements for sale in Peru, completing the clinical studies or finishing the draft protocol, upgrading the plant or pay for research staff, etc.  She had requested Ms Chow to pay the purchase price into the bank account of WEX HK in accordance with instructions from WEX HK. 

91.  The private placements suited Mr Shum because the price and quantity of shares were fixed by the relevant Stock Exchange and the shares would have a lock-up period of 12 months.  The capital raised would go to WEX and not previous owner of the shares.  On the other hand, Ms Chow would enjoy a 15% discount on share price.  She bought the shares “to push things along”. 

92.  I find that Mr Shum and Grace did induce Ms Chow and the Share Agreement did exist.  I am sure, without the China Patent, Ms Chow would not have entered into the Distribution Agreements or the Share Agreement.

L.  RELIANCE

93.  Mr Carolan submits that whilst the CP Representation was intended to be relied on by Ms Chow to enter into the Distribution Agreements, Ms Chow was either acting pursuant to the Share Agreement and/or as an investor motivated by potential profit to be earned in the usual way, not on the CP Representation. It made no sense that she would so invest only to better secure the benefits from performance of the Distribution Agreements when, on her case, this was already due to expire without more.  In February 2004, the Sanitary Authorization was obtained, which meant that export to Peru could follow without any need for further clinical trials. Yet Ms Chow continued to buy further lots of 200,000 and 217,928 shares respectively in Oct 2004.

94.  I am not persuaded by these arguments.  I repeat paragraph 92 above. I accept Ms Chow’s evidence (confirmed by §37 of Grace’s witness statement) that her focus was on the distribution rights.  She did not regard the investment in the shares was a good investment but wanted to push things along.  She did not regard spending CAD2 million on the shares as a lot of money. She was confident that even on the basis of what was in the Distribution Agreements, there was at least a 100% profit margin on the Peruvian sales.  This was credible in view of her medical and MBA qualifications and financial experience. She had started to purchase the shares 3 days after the Final Judgment and continued to do so for 3 years before the Peruvian Trials were suggested in 2004.  It would be fair to say that she had always expected the Distribution Agreements to be performed right up to Mr Carey’s communication with her.

95.  Mr Carolan points out that she has ceased further investment from January 2005 and sale of 60,000 shares in her name before the 2005 Announcement.  He also submits that the purchases and sales showed that Ms Chow had an eye on the market given that the share price had increased to CAD5.00 in December 2003 to January 2004; steadily dropping from $3.30 (January 2005 high) to $2.20 (1 June 2005) and down to $1.40 (30 June 2005 low).  

96.  Again, I am unable to accept this contention.  Ms Chow only stopped purchasing the shares and began to sell after about January 2005 when Mr Shum orally requested her to temporarily delay the commencement of the Acro Pharm Agreement.

97.  I find that Ms Chow did rely on the 2 sets of fraudulent misrepresentation to enter into the Distribution Agreements, the Share Agreement and each of the private placements.

98.  Even if I am wrong as to existence of the Share Agreement, that would not affect the overall picture.  As an ordinary shareholder, Ms Chow did rely on the inducement of Grace and the CP Representation to make each private placement.

M.  WHETHER THE LIMITATION PERIOD CAN BE POSTPONED

99.  Under section 26 of the Limitation Ordinance, Cap 347 (“the Ordinance”):

“(1) Subject to subsection (4), where in the case of any action for which a period of limitation is prescribed by this Ordinance, either –

(a) the action is based upon the fraud of the defendant;

(b) any fact relevant to the plaintiff’s right of action has been deliberately concealed from him by the defendant; ...

the period of limitation shall not begin to run until the plaintiff has discovered the fraud, concealment or mistake (as the case may be) or could with reasonable diligence have discovered it.”

100.  The issues are when Ms Chow came to know of the fraud and whether with reasonable diligence she could have discovered it earlier.

M(1).  When Ms Chow came to know about the fraud

101.  The evidence of Ms Chow and her Administrative Assistant Ms Chan was not disputed and I accept the same.

102.  Between December 2001 and May 2006, Grace had been faxing WEX’s new releases and updating Ms Chow on numerous occasions about WEX’s development.  Grace was not sure if she had sent a copy of the 2005 Announcement to Ms Chow.  I find it more likely than not that Ms Chow had not received a copy of the 2005 Announcement.  I also accept that Ms Chow herself was not used to searching the web for news of WEX/WEX HK.

103.  In April 2010, the unexpected phone call and email from Mr Carey prompted Ms Chow to make inquiries and she found the 2005 Announcement. 

104.  In December 2010, Ms Chan discovered that Nanning was still the registered owner of the China Patent according to SIPO’s website.  SIPO only announced the change of registered owner on 8 January 2003.  The date of actual change in registration (22 November 2002) was not there.

105.  Additionally, in December 2010, Mr Ma found on the internet an incomplete copy of the Final Judgment.

106.  Mainland judgments were not “public” in the way it is understood in Hong Kong.  Only parties could get a copy of the judgment.  Without the case number, parties’ names and dates, a member of the public could hardly get a copy, unless through PRC lawyers. 

107.  It was only on 4 March 2011 that Ms Chow (through PRC lawyers) obtained a certified copy of the China Patent which showed that SIPO had changed the registered ownership to PLA and Qiu on 31 October 2002.  (This was the date of grant of PLA’s request to change the bibliographic data regarding the China Patent.)

108.  On 23 September 2011, Ms Chow obtained a notarized copy of the Final Judgment.  I find that the fraudulent misrepresentation as to ownership of the China Patent came to Ms Chow’s knowledge on this date.

109.  On 15 May 2012, Baker & McKenzie wrote to Winland’s solicitors, stating that “our clients have no record of GlobalMed’s incorporation.  The fraudulent misrepresentation as to GlobalMed came to Ms Chow’s knowledge on this date.

M(2).  Whether with reasonable diligence Ms Chow could have discovered the fraud earlier

110.  WEX/WEX HK’s case is that Ms Chow could have discovered the fraud by the 2005 Announcement.  Mr Carolan accepts that 18 months for Ms Chan to do the investigation was reasonable.  Accordingly, he submits that Ms Chow could, with reasonable diligence, have discovered that the China Patent was lost by March/April 2007.  The writ was only issued on 3 April 2013.

111.  With respect, it was for WEX/WEX HK to prove that something had occurred to put Ms Chow on notice that the CP Representation might have been false: Peco Arts Inc v Hazlitt Gallery Ltd [1983] 3 All ER 193, 198e-203d; Betjemann v Betjemann [1895] 2 Ch 474, 480-482.

112.  In dealing with WEX/WEX HK’s earlier application to strike out this case on limitation ground, G Lam J had this to say in his decision dated 18 September 2013, at §§42-44:

“42. ... it would hardly appear to the plaintiffs that the defendants’ representations were false at the time when they were made in 2001 and 2003 respectively, still less that they were known by the defendants to be false when they were made. The relevant statements in the news bulletin and the annual report tend therefore to exonerate the defendants by implying that their representations were accurate prior to 2005 and that they had no knowledge prior to 2005 that the representations were false or had become false. On that basis, it seems to me that the effect of those statements is to conceal, rather than to reveal, the two facts that are crucial to the plaintiffs’ claims for fraud.

43. The defendants can point to nothing in the news bulletin and the annual reports or the surrounding circumstances that would suggest to any reader, including the plaintiffs, that the relevant statements in those public documents might be untrue, and that in fact the Beijing courts pronounced as early as in 2000 and 2001 that none of WEX, WEX HK and Nanning had any right in the China patent. On the contrary, the news bulletin and the annual reports are public announcements made by a regulated listed company which were meant to convey information accurately to shareholders and the public at large.

44.   In these circumstances there is force in Mr Remedios’ submission, relying on cases such as Betjemann v Betjemann [1895] 2 Ch 474 at 480 and Peco Arts Inc v Hazlitt Gallery Ltd [1983] 3 All ER 193 that until there was cause for suspicion, something that put them on inquiry, the plaintiffs were entitled to believe the public announcements to be accurate, without seeking to locate and turn up each and every relevant document so as to verify the facts asserted.”

...

113.  These words of G Lam J continued to hold true at the trial.  The 2005 Announcement was misleading (paragraph 67 above).  Neither WEX’s Annual Reports (2005, 2006 and 2007) nor the Annual Information Forms for 2005-2008 mentioned anything about the CP Litigation, the Administrative Action or the dates of any of the relevant judgments.  A reasonable reader would not have suspected that the CP Representation was false up to the date of the 2005 Announcement.

114.  But for the unexpected request to cancel the Acro Pharm Agreement, I find that Ms Chow would not have suspected anything wrong with the China Patent. She thereafter acted quickly to find out the truth.

115.  I find that even with reasonable diligence, Ms Chow would not have discovered the fraud until 23 September 2011.  Applying section 26 of the Ordinance, the present writ issued on 3 April 2013 was within 6 years from that date.

N.  LOSS AND DAMAGE

116.  The Plaintiffs have made previous claims against WEX/WEX HK including in HCA 1035/2011 for breach of the Share Agreement.  They could not proceed for one procedural reason or another.  Nothing there could have undermined the present claim for investment loss. 

117.  The share price had plummeted after the 2005 Announcement from CAD2.2 to CAD1.65 overnight.  In issue was whether or not WEX/WEX HK should only be liable for a maximum loss in respect of 150,000 shares, being 3 years’ purchase under the Share Agreement in the relevant period from December 2001 to November 2004. 

118.  Mr Carolan submits that Ms Chow and Mr Ma had purchased 681,000 shares more than were contractually “required”.  They had sold 110,000 in 2005, so the claim should be limited to 40,000 shares.  Moreover, he submits that she could have sold at a profit before 30 January 2014.

119.  I reject the submission.  Ms Chow had capacities of a distributor, an investor and an ordinary shareholder even if the Share Agreement did not exist.  She was induced and had relied on the CP Representation.  Ms Chow’s claim should not be limited to only 40,000 shares, although she limited herself to those shares of which she had documentary proof.

120.  The quantum was not in dispute, being based on the purchase price of the shares and commission upon sale, less the sale price.

(a)   If the court accepts Ms Chow’s case: damages would amount to CAD$1,385,276.02, made up of Chow’s loss (CAD471,882.57) + GCXL’s loss (CAD718,993.45) + Muscular’s loss (CAD194,400.00).

(b)   If the court holds that Ms Chow’s claim is limited to 40,000 shares, damages would be CAD28,061, ie (40,000 x CAD1.95) – 40,000 ÷ 217,928 x 276,435.82 + CAD800 commission.

121.  The Plaintiffs ask for interests from the respective dates of purchase of the Shares until payment. This was a case of fraud and WEX/WEX HK had concealed it for a lengthy period.  The Plaintiffs should be compensated for their loss of use of the money.  I consider it appropriate, under sections 48 and 49 of the High Court Ordinance, to award interest from the date of the respective purchase of the shares.

O.  FINDINGS AND CONCLUSION

122.  The Final Judgment took effect on the date of its issue.  Mr Shum fraudulently concealed the loss of the China Patent from Ms Chow. Ms Chow was induced to enter into the Distribution Agreements and Share Agreement.  She did not suspect that the China Patent was lost until about April 2010.  She had exercised reasonable diligence and discovered the fraud on 23 September 2011 when she obtained a notarized copy of the Final Judgment.  The writ was filed within 6 years from then.

123.  Ms Chow, GCXL and Muscular have bought the number of shares, on the dates, and at the price particularized in Table A above.  They suffered loss since the loss in the China Patent had caused substantial drop in the value of the shares.  They should be entitled to damages in accordance with paragraph 120 above.

P.  COSTS

124.  Costs should follow the event and be to the Plaintiffs. 

125.  There were 3 applications on day 1 of the trial. In respect of the application for specific discovery, costs should, in principle, be paid by the Defendants to the Plaintiffs.

126.  In respect of the application to strike-out a sentence in paragraph 46 of the witness statement of Mr Shum, I find that work done to strike-out was out of proportion to the significance of that sentence.  Notwithstanding the sentence was not relevant and it was not struck out, the Plaintiffs should, in principle, have borne the costs.

127.  In respect of the application to amend the statement of claim, most of the amendments were rejected save for those agreed by the Defendants.

128.  For all 3 applications, I take a broad brush approach and order the Plaintiffs to bear the costs of the strike-out which I assess at $30,000.  It should be set off against costs payable by the Defendants to the Plaintiffs.

129.  I therefore order as follows:

(1)   There be judgment to the Plaintiffs in the sums of CAD471,882.57, CAD718,993.45 and CAD194,400.00, respectively or their equivalent at the time of payment;

(2)   On a nisi basis, there shall be interests to the Plaintiffs on the judgment sums at judgment rate from the date of the respective purchase of the shares to the date of payment;

(3)   On a nisi basis, costs of this action should be paid by the Defendants to the Plaintiffs with certificates for 2 counsel;

(4)   On a nisi basis, the Plaintiffs shall pay $30,000 to the Defendants as costs for the striking out application; with no order as to costs on the other 2 applications.  Such costs are to be set off against costs in the preceding paragraph.

130.  I thank counsel and the PRC legal experts, Mr Xiong Yanfeng and Mr Dong Wei for their assistance.