KO LAI KUEN v. LI TAK MING AND OTHERS

CACV 141/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 141 OF 2012

(ON APPEAL FROM HCA NO. 1731 OF 2010)

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JUDGMENT

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Hon Lam JA (giving the Judgment of the Court) :

1. This is an appeal against the decision of Chung J [“the Judge”] of 13 June 2012 refusing to set aside the default judgment entered against the Defendants on 3 September 2011. It is not disputed that the default judgment was a regular judgment and the Defendants need to show real prospect of success in their respective defence before the judgment could be set aside. This appeal focused on this question alone. It was contended by Mr Tam on behalf of all three defendants that each of them had a good defence to the Plaintiff’s claims.

2. As mentioned by Yuen JA at beginning of the appeal, the defence of each defendant had to be considered separately and the merits of the Plaintiff’s claims against each of them might be different.

Plaintiff’s case

3. The Plaintiff’s case was that she was introduced to the 1^st Defendant in April 2009 who held out himself as an experienced bullion trader.  In October 2009 she signed several documents for the purpose of engaging in bullion trading through the introduction of the 1^st Defendant.  These documents are :

(a) A Chinese version of a master trading agreement with a BVI company having the same name as the 3^rd Defendant;

(b) An agency agreement with the 2^nd Defendant; and

(c) A supplemental agreement with the 2^nd Defendant.

4. For the purpose of such trading, at the instruction of the 1^st Defendant, the Plaintiff remitted two sums to the 3^rd Defendant on 9 and 13 October 2009 in the total amount of US$500,000.  Though the account was maintained with the BVI company, the 2^nd Defendant was authorized under the agency agreement to trade on the account of the Plaintiff.

5. In the Statement of Claim, it is pleaded that these agreements were made by the Plaintiff in reliance of three representations: two earlier representations by the 1^st Defendant (paras 3 to 7) and a third representation by all three defendants (paras 8 to 9).  It is also pleaded at para 10 that the representations were made by the 1^st Defendant “in the capacity as director/agent/employee/servant of the 2^nd and/or the 3^rd Defendants”.

6. The Plaintiff thought the trading agreement she signed was with the 3^rd Defendant, though it is a Hong Kong company as opposed to a BVI company.

7. In this action, the Plaintiff claimed that the representations were false and all the Defendants were liable to her for misrepresentations.  It is not necessary to set out all the alleged representations in this judgment.  The more pertinent ones are those pleaded at paras 6(d) and (e) and repeated at 9(b) and (c).  The latter reads :

“ …

b. the 1^st and 2^nd Defendants would report to the Plaintiff in case that her investment suffers loss of 50% or over,

c.  the 1^st and 2^nd Defendant would on behalf of the Plaintiff invest her money to buy gold at USD 1,050 per ounce and would hold the investment for medium to long term until the gold price reaches USD 1,200 per ounce to make a profit.”

8. The reporting of loss of 50% was actually a term of the Supplemental Agreement which went further: trading should stop when loss reached 50% and there should be a meeting between the parties and it would be for the Plaintiff to decide whether to continue with trading.

9. The Plaintiff’s case is that the 1^st and 2^nd Defendants failed to report to her in respect of the trading. She said she had received a statement from the 3^rd Defendant on 14 October 2009.  That statement had not been exhibited and we do not know whether it was from the BVI company or the 3^rd Defendant. But no further statement had been received until May 2010.

10. On 23 March 2010, the Plaintiff was able to “confront” the 1^st Defendant and on 25 March she was told that her investment had suffered huge loss.  She challenged him on how such loss was sustained and said she would disclose his mishandling of her funds to the media. He promised to return the US$500,000 to her.  He executed a promissory note to her to that effect.  Again, for reasons we are not told, the promissory note was not exhibited in the evidence before us.  Neither did the Plaintiff plead the promissory note as a cause of action in the Statement of Claim.

11. In the Statement of Claim, the Plaintiff’s causes of action were formulated as follows :

(a) Fraudulent or reckless misrepresentations (paras 27 and 28);

(b) Misrepresentations and breach of statutory duty pursuant to section 108(2) of the Securities and Futures Ordinance Cap 571 (para 29);

(c) Misrepresentations under section 3 of the Misrepresentation Ordinance Cap 284;

(d) Breach of what she called “the Investment Agreement” (para 34);

(e) Breach of the master trading agreement (she referred to it as the Chinese Agreement in her pleadings) (para 35);

(f) Breach of fiduciary duties (paras 37-38);

(g) Negligence (paras 40-41).

The default judgment

12. Default judgment was entered on 3 September 2011 against all three defendants in the sum of US$500,000 plus interest.

13. It is trite that when a judgment is entered in default of defence, it is entered on the basis of the causes of action and prayers pleaded in the statement of claim.  It is not a judgment entered for whatever other claims a plaintiff may have against the defendant which had not been pleaded.

14. In the present case, if one compares the relief sought in the Statement of Claim and the default judgment, the default judgment entered on 3 September 2011 could only be entered on the basis of prayer (b).  The prayers in the Statement of Claim sought these relief,

“a. A declaration that the Plaintiff was induced to enter into the Investment Agreement and the Chinese Agreement by the misrepresentations made by the 1^st, 2^nd and 3^rd Defendants;

b. Rescission of the Investment Agreement and the Chinese Agreement and return of the Investment Fund of USD 500,000.00 to the Plaintiff;

c. Alternatively, liquidated damages in the amount of USD 500,000.00;

d. Alternatively, damages to be assessed; …”

15. Though prayer (c) also seeks US$500,000 as liquidated damages, there is no pleading in the body of the Statement of Claim to support any claim for liquidated damages.  The reference to the promissory note at para 25 of the Statement of Claim was not a plea of liquidated damages.  Liquidated damages are genuine pre-estimate of loss provided for in a clause in the contract.  The promissory note was, on the Plaintiff’s pleaded case, a promise given after the event. 

16. Apart from prayer (c), the only other prayer claiming damages was prayer (d), seeking damages to be assessed.  Thus, if a default judgment was to be entered for damages, it should be an interlocutory judgment as opposed to a final judgment, see Order 19 Rule 3.

17. Under prayer (b), the US$500,000 was not claimed as damages.  Rather, it was a claim for the return of the money paid upon the rescission of the Investment Agreement and the Chinese Agreement.

18. The Investment Agreement, according to the Plaintiff’s pleading, was made between the Plaintiff and the 2^nd Defendant (para 12 of the Statement of Claim) whilst the Chinese Agreement was made between the Plaintiff and the 3^rd Defendant (para 18).

19. However, in respect of the breach of the Investment Agreement, the Plaintiff pleaded that both the 1^st and 2^nd Defendants were in breach, see para 34 of the Statement of Claim.  Actually, in other paragraphs the Plaintiff also pleaded that both the 1^st and 2^nd Defendants undertook obligations under the Investment Agreement, see paras 13, 17 and 21.  At the same time, in other paragraphs, the Plaintiff pleaded that the 1^st Defendant acted in the capacity as representative of the 2^nd Defendant, see paras 15 and 16.

The defence

20. At the hearing below, the Defendants did not put forward any draft defence. The defence case was set out principally in the 4^th Affirmation of the 1^st Defendant.  Though a draft defence was included in the appeal bundle as an item in the correspondence section, no leave has been granted for this document to be placed before the court on appeal.  Mr Tam accepted that this court should focus on the defence case set out in the 4^th Affirmation.

21. The 1^st Defendant denied there were any misrepresentations. The main defence was that the Plaintiff had chosen a high risk investment scheme and after trading in the Plaintiff’s account had suffered losses close to 50% of her invested amount, he told her the 2^nd Defendant had devised a “New Strategy” for her which he described at paras 41 to 44 of the affirmation,

“New Strategy

41. On or about 27^th or 28^th October 2009, I called the Plaintiff and told her that if the gold price fell further, we had to stop all trading. The Plaintiff was not happy with it.

42. Since I truly believed in our strategy and I and my team were very confident that the gold price would rise, I told the Plaintiff that the 2^nd Defendant had devised a “New Strategy” and the 2^nd Defendant would inject funds in to the Plaintiff’s account with MIF-BVI on the agreement that if the investment should turn profitable at the end of the six months period the 2^nd Defendant should take back the injected funds.

43. The Plaintiff agreed to the proposal and to carry on with the trading. At that time, she already knew that a loss closed to 50% of her total investment was caused. Yet, the Plaintiff did not raise the complaints which she now raised in her Statement of Claim at all.

44. On 29^th October 2009, the Plaintiff had suffered about 50% loss on her investment and I immediately contacted her.  The 2^nd Defndant injected more than US$500,000 into the Plaintiff’s account as promised till the Plaintiff’s account ceased to trade.”

22. He further said due to unfavourable market condition, the New Strategy was not successful and the funds injected by the 2^nd Defendant were lost as well.  The Plaintiff’s investment had suffered a total loss.

23. The 1^st Defendant agreed he had signed a document in April 2010 stating he would pay her back the sum she invested.  He said the document was signed under threat by the Plaintiff of using means to prevent him from leaving Hangzhou.

The judgment

24. The Judge did not find the defendants’ version of events to be believable.  His reasons for coming to that view were set out at paras 15 to 22 of the judgment of 13 June 2012.

25. The Judge explained why he considered the 1^st Defendant should also be personally liable at para 25 of the judgment. In short, he found that in the factual context of this case, even though the 1^st Defendant was acting as agent for the 2^nd Defendant, he should also be liable for the claims in tort as he was the person in whom the Plaintiff reposed trust and he was the person who made the representations.

26. As regards the 3^rd Defendant, though the Judge recognized that in the Chinese Agreement the contracting party was the BVI company, he drew the inference at para 28 of the judgment that “both companies were part of the same scheme devised by [the 1^st Defendant] (either alone or with others) to entice the Plaintiff” and he considered that judgment was correctly entered against the 3^rd Defendant.

The appeal by the 2^nd Defendant

27. We shall deal with the appeal by the 2^nd Defendant first.  Mr Tam submitted on behalf of the 2^nd Defendant that the Judge was wrong in holding that the defence version of events was unbelievable.  He said the Judge had misunderstood the evidence of the 1^st Defendant. The New Strategy was that the funds injected by the 2^nd Defendant would be retrieved should the investment turn profitable.  Thus, it was not wrong for the 1^st Defendant to say that the investment of the Plaintiff had suffered a total loss in March 2010 when trading could continue beyond 24 March 2010.

28. We do not think the Judge misunderstood the evidence.  The Judge was aware of the defence case as to the injection of funds by the 2^nd Defendant as he expressly referred to it at para 18 of the judgment.

29. When the Judge referred to the 1^st Defendant not telling the plaintiff the whole story on 24 March 2010 with regard to total loss, the Judge obviously referred to the fact that the 1^st Defendant did not inform the Plaintiff that there was still credit balance in her account (even though the defence said that that credit stemmed from funds injected by the 2^nd Defendant) and trading would continue beyond that date. 

30. A fair reading of the judgment shows that the Judge found that the account statements produced by the Defendants as exhibit LTM-11 were inconsistent with the evidence of the 1^st Defendant.  The effect of those account statements were set out by the Judge at para 13 of the judgment.

31. At the hearing of the appeal, when this court invited Mr Tam to inform us whether he agreed with para 13 of the judgment, counsel initially said he accepted those findings. Later on he said he would dispute them.  When pressed about the extent to which he disputed those findings, he was unable to offer assistance.

32. The statements produced as LTM-11 were rather unsatisfactory.  Taking them on their face value, the statements did not show that the Plaintiff had suffered loss approaching to 50% of her investment at the end of October 2009.  There was no reason why a New Strategy had to be devised at that stage.  Mr Tam’s exclusive reference to two transactions on 27 and 28 October 2009 without taking account of the profit achieved in other earlier transactions could not be right and the 1^st Defendant did not say so in his affirmation. 

33. And the Judge was correct in pointing out at para 20 the statements showed trading in the Plaintiff’s account continued after 24 March 2010 which is inconsistent with the defence case that the 1^st Defendant had brought an end to the Plaintiff’s investment by signing the promissory note on 24 March 2010. 

34. There was no explanation whatsoever for such inconsistencies in the evidence of the Defendants.  In the circumstances, it was open to the Judge to hold the defence version to be unbelievable and the 2^nd Defendant had failed to discharge the burden of putting forward a defence with a real prospect of success. 

35. Because of the serious internal inconsistency between the defence’s evidence and their own documents, this is a case where the Judge could properly reject the defence as inherently unbelievable.  We do not agree with Mr Tam’s suggestion that the Judge had wrongly embarked on a trial on affidavits between competing versions of event put forward by the parties.

36. The 2^nd Defendant was the party to the Investment Agreement. Though the funds were remitted by the Plaintiff to the 3^rd Defendant, this was done at the request of the 1^st Defendant as representative of the 2^nd Defendant. The 2^nd Defendant is legally liable for returning the US$500,000 to the Plaintiff upon rescission of the Investment Agreement, as adjudged in the default judgment.

37. We would dismiss the appeal by the 2^nd Defendant.  

The appeal by the 1^st Defendant

38. As mentioned above, the Statement of Claim was rather ambiguous as to whether the 1^st Defendant was a party to the Investment Agreement.  On the face of the documents, the Agency Agreement and the Supplemental Agreement were made by the 2^nd Defendant, not the 1^st Defendant.

39. In the appeal, Mr Wong contended that the default judgment against the 1^st Defendant could be supported on the ground that an agent could be jointly liable for tort with his principal.  The Judge apparently took the same view.

40. With respect, as explained above, the default judgment was not entered on the basis of the defendants’ liability in tort.  The default judgment for the repayment of US$500,000 could only be granted on the basis of the contractual claim for rescission. If the intention of the Plaintiff were to seek default judgment in tort, only an interlocutory judgment for damages to be assessed could have been granted.  But that was not the judgment obtained.

41. Only parties to the contract could be held liable by way of contractual remedies for repayment upon rescission.  In light of the documents and the way in which the Plaintiff pleaded her case in the Statement of Claim, we are of the view that the defence that the 1^st Defendant was not a party to the Investment Agreement (and there was no suggestion that he was a party to the Chinese Agreement) is a defence with real prospect of success.

42. In light of that, it is not necessary for us to comment on the prospect of success of the 1^st Defendant’s defence to the tort claims.  We only add that we are not impressed by Mr Wong’s submission that because the 1^st Defendant had held himself out as a licensed person in respect of regulated activities under the Securities and Futures Ordinance he had voluntarily assumed personal responsibility to the Plaintiff in respect of bullion trading which (Mr Wong had to accept) is not a “regulated activity” under that ordinance. 

43. We would allow the appeal by the 1^st Defendant.

The appeal by the 3^rd Defendant

44. The defence of the 3^rd Defendant was that it was not a party to the Chinese Agreement and the account of the Plaintiff was maintained with the BVI company and trading was done in Indonesia.  It is said that funds from the Plaintiff were channelled through the 3^rd Defendant to “a company of DGM group to be traded by [the BVI company]” (para 37 of the 4^th Affirmation of the 1^st Defendant).

45. There is a dispute of fact as to whether the page in the Chinese Agreement identifying the contracting party as the BVI company was given to the Plaintiff when she signed the same.  On the evidence before the court, we think the 3^rd Defendant had a real prospect of success in its defence that it was not a party to the Chinese Agreement.

46. The Judge did not uphold the default judgment against the 3^rd Defendant on the basis that it was a party to the Chinese Agreement. Instead he rejected the application of the 3^rd Defendant to set aside the judgment on the basis that it was a party to a scheme.

47. With respect, that was not a basis advanced in the Statement of Claim for holding the 3^rd Defendant liable.  Nor was it the basis on which the default judgment was granted.

48. Mr Wong sought to support the default judgment by inviting the court to pierce the corporate veil. The only plea with regard to the piercing of corporate veil in respect of the 3^rd Defendant was paragraph 1(d) of the Statement of Claim.  It was pleaded there that “the 3^rd Defendant was the alter ego of the 1^st Defendant”.  There was no suggestion that the BVI company was the alter ego of the3^rd Defendant or vice versa. 

49. Since the default judgment against the 1^st Defendant should not stand, the plea in para 1(d) could not advance the Plaintiff’s claim against the 3^rd Defendant.

50. We would allow the appeal by the 3^rd Defendant.

Disposition

51. We order that the appeal by the 1^st and 3^rd Defendants be allowed and the default judgment entered against them is set aside.  They have 14 days to file their respective defence.  We also order by way of costs order nisi that the Plaintiff shall pay the costs of the appeal of the 1^st and 3^rd Defendants to these defendants.

52. The appeal by the 2^nd Defendant is dismissed and there shall be a costs order nisi that the 2^nd Defendant shall pay the costs of its appeal of the Plaintiff.

53. As regards the costs below, given that the judgment was a regular one, we would not disturb the order of the Judge as to costs.