KEEN LLOYD ENERGY LTD v. BANK OF CHINA (HONG KONG) LTD

HCA1299/2004
& HCA1092/2006

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NOS. 1299 OF 2004 AND 1092 OF 2006

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(HEARD TOGETHER)

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D E C I S I O N

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A. THE APPLICATIONS

1. The Bank of China Limited (“BOC”) applied to strike out the statements of claims of Keen Lloyd Energy Limited (“Energy”) in both HCA1299/2004 and HCA1092/2006 (“the 2004 Action” and “the 2006 Action”) because the claims :

(1)	are obviously unsustainable by reason of :
	(a)	issue estoppel arising from the decision of Deputy Judge L. Chan in the 2004 Action dated 12 April 2006 (“the Decision”);
	(b)	time-barred in respect of the 2006 Action;
	(c)	the statements of claim disclosing no reasonable cause of action (“Ground 1(a), (b) and (c)” respectively);
(2)	are inconsistent and bound to fail (“Ground 2”); and
(3)	amount to an abuse of process (“Ground 3”).

2. After the hearing of BOC’s application in July 2007 and before the handing down of this Decision, Energy applied for leave to adduce further evidence, namely two letters between Sin Hua Bank Ltd (“SHB”), BOC’s predecessor, and Hong Kong Monetary Authority dated 18 May 1998 and 17 July 1998.  On 4 January 2008, I dismissed Energy’s application with oral reasons given.

3. The background leading to BOC’s application for striking out may be summarised as follows.

B. BACKGROUND

4. Energy is a company in the Keen Lloyd Group of companies.  The holding company was Keen Lloyd Resources Ltd, formerly known as Keen Lloyd Investments Ltd and Keen Lloyd Ltd (“Resources”).  The other subsidiary of the Group that featured is Keen Lloyd Motors Ltd (“Motor”).  At all material times, the Group was controlled by the majority shareholder, Mr Chin Kam Chiu (“Mr Chin”).

5. The Group had banking relationship with SHB.  At the material times, SHB maintained two branches, one in Hong Kong (“the Hong Kong Branch”), the other in Shenzhen (“the Shenzhen Branch”).  SHB’s then general manager was a Mr Wu Jun Sheng (“Mr Wu”).

6. The Group had general banking facilities with SHB for : (a) HK$1.656 billion to HK$1.827 billion between July 1997 and February 1998 and (b) HK$1.75 billion between April and September 1998.  The facilities were secured by, among other things, pledges over realty owned by various companies in the Group.

7. Since 2000, defaults occurred upon which SHB began to taken actions to recover the outstanding debts.  Litigations ensued.  Eventually Motor and Resources were wound up.

8. On 24 March 2004, Mr Chin was, together with four officers of SHB, convicted of conspiracy to defraud SHB in HCCC158/2003 for having dishonestly applied for and negotiated 25 letters of credit between 19 November 1998 and 16 April 1999 when there was no underlying commercial transaction behind them.  By November 1998, the Group owed huge sums of money to SHB, mainly in respect of overdue T/R, and the Hong Kong Branch had exercised its rights to retain the Group’s goods.  The conspiracy involved the opening of the letters of credit by the Shenzhen Branch based on false underlying documents ostensibly to finance the sale and purchase of goods and apply the funds so generated to secure the release of the detained goods.  The conspiracy did not increase the Group’s indebtedness to SHB, save that further bank and interest charges were incurred in respect of the letters of credit.  But it did cause SHB to lose its security over the detained goods and in its place obtained no security, as all the letters of credit related to fictitious transactions.  Mr Chin’s conviction was later upheld on appeal on 22 July 2005 in CACC179/2004.

9. Shortly after Mr Chin’s conviction, Energy commenced the 2004 Action against BOC on 1 June 2004.  The indorsement on the writ (“the Original 2004 Indorsement”) set out a claim of fraudulent misrepresentation and claimed damages of HK$5 billion.  On 12 December 2005, Energy applied for leave to amend its claim (“the Amendment Application”).  Leave was granted by the Registrar on 21 December 2005.  Energy then amended the indorsement (“the 1^st 2004 Amended Indorsement”) and filed a statement of claim (“the Original 2004 SOC”).  BOC appealed.  By the Decision, the Deputy Judge set aside the 1^st 2004 Amended Writ and the Original 2004 SOC and restored the Original 2004 Indorsement. 

10. Pursuant to leave granted by the master on 30 May 2006, Energy amended the writ again and filed a new statement of claim (“the New 2004 SOC”).

11. In the New 2004 SOC, Energy pleaded a reckless, alternatively negligent misrepresentation by Mr Wu orally to Mr Chin between July and December 1997 that the Hong Kong Branch could and would increase the general banking facilities from HK$1,656 million to HK$2,400 million and that such increased facilities could be used by Energy, Motor and Resources for the issue of letters of credit (“the 1^st Misrepresentation”), when SHB could not lawfully or did not have the requisite approval to do so.

12. On 22 May 2006, Energy commenced the 2006 Action by writ endorsed with a statement of claim (“the 2006 SOC”).  In the 2006 SOC, Energy pleaded :

(1)

A fraudulent, alternatively reckless or negligent, misrepresentation by Mr Wu orally to Mr Chin between early and late 1998 that in return for additional securities, the Hong Kong Branch and the Shenzhen Branch could and would jointly further increase the general banking facilities from HK$2,400 million to HK$3,100 million and that such increased facilities could be used by Energy, Motor and Resources for the issue of letters of credit (“the 2nd Misrepresentation”), when SHB could not lawfully or did not have the requisite authority approval to do so.

(2)

Alternatively, a contract based on the facts giving rise to the 2nd Misrepresentation (“the Contract”).

13. In sum, Energy raised three causes of action based on : (1) the 1^st Misrepresentation; (2) the 2^nd Misrepresentation; and (3) the Contract.

14. I now turn to BOC’s grounds for striking out and begin with Ground 1(a).

C. GROUND 1(a) — ISSUE ESTOPPEL

15. The main question is whether the Decision has created any issue estoppel thereby precluding Energy to raise any of the causes of action based on the 1^st Misrepresentation, the 2^nd Misrepresentation and the Contract.

16. The general legal principles on issue estoppel are well summarized in Halsbury’s Law of Hong Kong, Vol.11(2), para.170-027 at p.280 :

“	A party is precluded from contending the contrary of any precise point which, having once been distinctly put in issue, has been solemnly and with certainty determined against him.  Even if the objects of the first and second actions are different, the finding on a matter which came directly (not collaterally or incidentally) in issue in the first action, provided it is embodied in a judicial decision that is final, is conclusive in a second action between the same parties and their privies.  This principle applies whether the point involved in the earlier decision, and as to the which the parties are estopped, is one of fact or one of law, or one of mixed fact and law.  The conditions for the application of the doctrine have been stated as being that :
	(1)	the same question was decided in both proceedings;
	(2)	the judicial decision said to create the estoppel was final; and
	(3)	the parties to the judicial decision or their privies were the same persons as the parties to the proceedings in which the estoppel is raised or their privies.”

17. Depending on its nature and substance, a determination in an interlocutory application may be capable of giving rise to an issue estoppel : see Re Chime Corp Ltd (No. 2) [2003] 2 HKLRD 945, para.23 at p.954.

18. However, even when the court has expressly determined the same issue in the earlier proceeding, an issue estoppel will not necessarily result.  Only determinations which are necessary to the decision, and fundamental to it, will found an issue estoppel.  Other determinations, however positive, cannot : Spencer Bower, Turner and Handley on The Doctrine of Res Judicata, para.201 at p.103.  The inquiry is : is the determination such that without it the judgment cannot stand?  See Spencer Bower, para.202 at p.105. 

19. The inquiry entails a careful reading of the Decision and a closer examination of the pleadings in the 2004 Action then before the Deputy Judge.  Three questions arose :

(1)	What determinations had the Deputy Judge made in the Decision?
(2)	Were those determinations necessary and fundamental to his decision?
(3)	Is any of Energy’s current claims based on the 1st Misrepresentation, the 2nd Misrepresentation and the Contract caught by the issue estoppel arising from the Decision?

I will discuss them in turn.

C.1. What determinations had the Deputy Judge made?

20. In the Original 2004 Indorsement, Energy advanced a claim against BOC for damages in the sum of HK$5 billion for fraudulently misrepresenting in or about December 1997 to Energy that it could and subsequently had increased the Group’s credit facilities from HK$1.8 billion to HK$2.3 billion, when it could not and in fact did not increase such credit facilities.  Thus, the only cause of action stated in the Original 2004 Indorsement was one of misrepresentation.  And only one misrepresentation was alleged.

21. Energy then expanded its claims in the 1^st 2004 Amended Indorsement.  There, Energy claimed against BOC for (1) damages for the fraudulent and/or reckless/and/or negligent misrepresentation made during the period from around 1997 to around the end of 1998 to Energy that it could, would and subsequently had increased credit facilities (for the same to be used by Energy together with Motors and Resources) from HK$1,656 million to HK$3,080 million, when it could not and in fact did not increase such credit facilities to the amount of HK$3,080 million as represented; and (2) damages for breach of contract in respect of the said increase of credit facilities.

22. Then in the Original 2004 SOC, Energy pleaded two oral misrepresentations by Mr Wu to Mr Chin thus :

(1)

A reckless, alternatively negligent, misrepresentation made in around July 1997 to December 1997 that the Hong Kong Branch would increase the general banking facilities from HK$1,656 million to HK$2,400 million and that such increased facilities could be used by Energy together with Motor and Resources for, inter alia, the issue of letters of credit (“the 1st Misrepresentation in its Original Form”).

(2)

A fraudulent, alternatively reckless or negligent, misrepresentation made in around early to late 1998 that the Hong Kong Branch would further increase the general banking facilities to HK$3,080 million and such further increased facilities could be uses by Energy together with Motor and Resources for, inter alia, the issue of letters of credit (“the 2nd Misrepresentation in its Original Form”).

23. Energy further pleaded a contract came into existence between Energy and the Hong Kong Branch that the general banking facilities would be further increased from HK$2,400 million to HK$3,080 million (“the Contract in its Original Form”).

24. Thus before the Decision, Energy had raised in the pleadings of the 2004 Action three causes of actions based on : (1) the 1^st Misrepresentation in its Original Form; (2) the 2^nd Misrepresentation in its Original Form; and (3) the Contract in its Original Form.

25. When the matter came before the Deputy Judge, BOC appealed against the leave granted by the Registrar for amending the Original 2004 Indorsement and filing of the Original 2004 SOC and applied to strike out the Original 2004 SOC.  As noted, the Deputy Judge allowed the appeal and struck out the Original 2004 SOC.

26. On a proper and careful reading of the Decision, the Deputy Judge had plainly determined that :

(1)	The limitation period for the cause of action based on the 2nd Misrepresentation in its Original Form would have expired before 12 December 2005 when the Amendment Application was taken out and Energy had failed to show that BOC had no reasonably arguable defence of limitation to it.
(2)	The limitation period for the cause of action based on the Contract in its Original Form would have also expired before 12 December 2005 when the Amendment Application was taken out on 12 December 2005 and Energy had failed to show that BOC had no reasonably arguable defence of limitation to it.
(3)	It was plain and obvious that the alleged representations relied upon to ground the 1st Misrepresentation in its Original Form and 2nd Misrepresentation in its Original Form were mere promises and did not disclose any reasonable cause of action.

Determinations (1) and (2) were made in connection with BOC’s appeal and Determination (3), BOC’s striking out application.

C.2. Were the Determinations necessary and fundamental?

27. Mr Yuen, SC for Energy argued that the Determinations by the Deputy Judge were not final or necessary to his decision.  He essentially took three points.

28. First, Mr Yuen contended that the only issue before the Deputy Judge was very narrow, namely, whether Energy should be allowed to amend the Original 2004 Indorsement and to file the Original 2004 SOC out of time, and in particular, whether the test in Welsh Development Agency v. Redpath Dorman Long Ltd [1994] 1 WLR was satisfied.

29. I disagree.  A careful reading of the Decision revealed this.  Counsel first debated whether BOC would be prejudiced by the operation of section 35(1) of the Limitation Ordinance if the two new claims, namely the 2^nd Misrepresentation in its Original Form and the Contract in its Original Form, were to be added by the Amendment Application, and if so, whether the test laid down in Welsh Development Agency was satisfied.  The Deputy Judge ruled in favour of BOC.  But he did not stop there.  He went further and after considering counsel’s submissions, made Determinations (1) and (2).  And based on those two Determinations, he allowed the appeal.

30. Thus analyzed, Determinations (1) and (2) are plainly necessary and fundamental to his allowing BOC’s appeal.  For without those Determinations, his decision to allow the appeal simply could not stand.

31. Mr Yuen next referred to paragraph 27 of the Decision where the Deputy Judge said that having allowed the appeal, it was not necessary for him to deal with the striking out application as the same result had already been achieved by allowing the appeal but he would nevertheless briefly deal with it in order to make plain the merits so as to justify the costs order for the summons.  Mr Yuen thus submitted that Determination (3) was not necessary to his decision for striking out.

32. Again, I disagree.  The Deputy Judge had gone further than just merely illustrating the merits of the striking out application to justify the costs order when he made Determination (3).  He did deal with the striking out application substantively, made Determination (3) and ordered the 2004 SOC be struck out on that basis.  In such circumstances, Determination (3) is necessary and fundamental to his decision to strike out.  His observation in paragraph 27 alone would not render Determination (3) unnecessary for his decision to strike out.

33. Finally, Mr Yuen referred to the solicitors’ exchange of correspondence after the handing down of the Decision and argued that no issue estoppel arose.  But the correspondence clearly shows that the solicitors were then discussing about the effect of paragraph 30 of the Decision.  There, the Deputy Judge accepted BOC’s submission that the implied terms as pleaded could not be implied to the Contract in its Original Form as it was not necessary to have them for the sake of business efficacy.  BOC indicated in the letter dated 28 April 2004 that it was prepared not to rely on it as an issue estoppel, and nothing more.  I fail to see how the correspondence can possibly assist Energy on the matters relating to issue estoppel now before me.

34. For the above reasons, I rule that Determinations (1) to (3) do give rise to issues estoppel, precluding Energy from raising them again in either the 2004 or 2006 Action.

C.3. Are Energy’s current claims caught by the issues estoppel?

35. This brings me to examine if Energy’s current claims based on the 1^st Misrepresentation as pleaded in the New 2004 SOC, and the 2^nd Misrepresentation and the Contract as pleaded in the 2006 SOC are caught by the issues estoppel.

36. The 1^st and 2^nd Misrepresentations are each virtually identical to their Original Forms.  In the 1^st Misrepresentation, “would and could” is there to replace “would” in its Original Form.  In the 2^nd Misrepresentation, “in return for additional securities” and “could and would” are added.  Mr Chow, SC for BOC submitted that those slight differences are introduced to meet the various objections raised in the Decision.  But they remain the same misrepresentations in substance as their Original Forms.  So is the case for the Contract.  I entirely agree.

37. In my view, the 1^st Misrepresentation, the 2^nd Misrepresentation and the Contract are all caught by the issues estoppel created by the Decision.  Energy is debarred from raising them again in the New 2004 SOC and the 2006 SOC.  For this reason alone, the New 2004 SOC and the 2006 SOC must be struck out.

D. OTHER GROUNDS

38. Having reached the above conclusion, it is not necessary for me to deal with other grounds relied on by BOC.  For completeness, I will very briefly state my views on them as follows.

D.1. Ground 1(b)

39. On Ground (1)(b), I fully agree with Mr Chow’s submissions that the claims in the 2006 Action are all time-barred.

40. For the claim based on the Contract, the limitation period is six years from the date on which the cause of action accrued : section 4(1)(a) of the Limitation Ordinance, Cap. 347.  And for an action in contract, the cause of action generally accrues as soon as there is a breach.

41. Energy pleaded that the Contract was made in 1998 and that SHB, among other things, had never procured or provided for the use of Energy increased general banking facilities to the level of HK$3.1 billion.  Energy had however not pleaded expressly the time when the increased facilities should have been procured or provided.  That being the case, they should be made available within a reasonable time of the making of the Contract.  Mr Chow contended that in the circumstances, it cannot be seriously suggested that under the Contract, the time for SHB to procure or provide the increased facilities had not yet arrived before 22 May 2000, nearly 1½ years after the date of the Contract.  Thus the breach would have occurred more than six years before the date of the writ in the 2006 Action.  The cause of action based on the Contract is plainly time-barred.  I agree.

42. On the claims based on the 2^nd Misrepresentation, the starting point is that the relevant limitation period is six years from the date on which the cause of action first accrued : section 4(1)(a) of the Limitation Ordinance.  Energy pleaded that the 2^nd Misrepresentation was made between early to late 1998.  It is said to be a negligent, fraudulent or reckless misrepresentation.

43. In the case of the negligent misrepresentation, the cause of action accrues when damage occurs.  And damage must have occurred when SHB failed to provide the increased facilities, which was well before 22 May 2000.  It is thus time-barred.

44. In the case of the fraudulent misrepresentation, the limitation period does not begin to run until the plaintiff has discovered the fraud or could with reasonable diligence have discovered it : section 26(1) of the Limitation Ordinance.  I agree with Mr Chow that the fraud should or could with reasonable diligence have been discovered soon after it was made clear that the general banking facilities never reached the level as allegedly promised by Mr Wu to Mr Chin.  Energy relied on section 26(1)(b) of the Limitation Ordinance by alleging that there was concealment on the part of SHB.  But as rightly submitted by Mr Chow, no fact has been pleaded in support of the allegation that SHB had deliberately concealed any fact relevant to Energy’s right of action based on the fraudulent misrepresentation.  Energy can derive no support by relying on the alleged deliberate concealment.  The claim based on fraudulent misrepresentation is clearly time-barred.

45. Finally, I agree with Mr Chow that the case of the reckless misrepresentation does not require separate consideration because it would be covered by the limitation periods to either negligent or fraudulent misrepresentation.

46. All time-barred, Energy’s claims must be struck out.

D.2. Ground 1(c)

47. On Ground 1(c), Mr Chow in essence submitted that both the New 2004 SOC because the misrepresentations pleaded in the New 2004 SOC are not statements of fact.  There is no proper basis for the implied representations pleaded in paragraph 5 of the New 2004 SOC.  There is no actionable loss.  In any event the plea of loss and damage is wholly inadequate and unparticularised.  And Energy’s plea for a spilt trial is not an answer to the lack of particulars of loss.  I fully agree with Mr Chow’s submissions.

48. Mr Chow advanced similar attacks to the 2006 SOC : the misrepresentations pleaded are not statements of fact; there is no proper basis for the implied representations pleaded in paragraphs 6 and 9(2) of the 2006 SOC; and there is no actionable loss, and in any event the plea of loss and damage is wholly inadequate and unparticularised.  I also agree with his submissions entirely.

49. For those reasons, both the 2004 New SOC and 2006 SOC must be struck out.

D.3. Ground 2

50. On Ground 2, Mr Chow contended that the contemporaneous evidence, the evidence and findings in HCCC158/2003, and the defence raised in HCA926, 928 and 929/2004 (“the Receivers Actions”), commenced by the receivers of various properties under three legal charges made by Energy in favour of SHB against the tenants showed that Mr Chin knew SHB was unable to grant the Group additional banking facilities sought.  Hence Energy was not affected by the alleged misrepresentations and there could be no reliance.  In order to make good his contention, Mr Chow in effect asked me to embark on a very detailed examination of the affidavit evidence.  This is verging on a mini-trial on affidavit.  I do not think such an approach is called for in a striking out application.  This ground fails.

D.4. Ground 3

51. On Ground 3, it is my view that Energy has abused the court’s process by re-litigating causes of action caught by the issues estoppel created by the Decision.  That is sufficient for present purposes.

52. However, Mr Chow went further to contend that the 2004 and 2006 Actions amount to an abuse of process in that :

(1)	the issue of the 1st Misrepresentation has already been adjudicated by Chu J in the Receivers Action;
(2)	the 2nd Misrepresentation could and should have been raised in the Receivers Action; and
(3)	the 2nd Misrepresentation amounts to an abusive collateral challenge to the judgment in the criminal proceedings against Mr Chin.

53. For present purposes, I do not think I need to dwell on these matters.  Suffice it to say that having considered Mr Chow’s submissions, I have reservation if BOC can rely on those matters to ground a complaint of abuse of process on the part of Energy in the 2004 and 2006 Action.

E. ORDER

54. I would order that the New 2004 SOC and the 2006 SOC be struck out and dismiss both the 2004 Action and the 2006 Action.  I also make an order nisi that costs be to BOC, including all costs reserved, to be taxed if not agreed.