FOSHAN HUA DA INDUSTRIAL CO. v. JOHNSON, STOKES & MASTER (a firm)

HCA 12997/95

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 12997 OF 1995

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J U D G M E N T

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The History

1. The plaintiff is a company incorporated under Mainland laws in Foshan City, Guangdong Province. It is a state owned corporation managed by city officials and a Mr Deng Hong is its general manager. It engages in a wide variety of business activities, and has investments in manufacturing enterprises, restaurants, cinemas and much besides.

2. In 1992, an approach was made to the plaintiff company (to whom I shall also periodically refer as "Hua Da") for a loan allegedly in connection with the development of land in Caroline Hill Road, Causeway Bay, owned by a Hong Kong registered private company called Vaxholm Investment Ltd. ("Vaxholm") which had acquired the land in 1989.

3. Vaxholm was owned as to 65% by a company called Hiyanan Co. Ltd. ("Hiyanan") and as to 35% by L. Hoffman Holding Ltd. ("Hoffman"). Half of the shares in Hiyanan were owned by China East Investments Ltd. ("China East"), and the other half by Crystal Finance Ltd ("Crystal Finance"). All, or almost all, the shares in China East and Crystal Finance were owned by two individuals, namely, Mr Wong Siu Ling and Mr Fok Chun Wah, both of whom lived in Hong Kong. The approach for the loan was made by Mr Wong.

4. Between 22nd May 1992 and 18th August 1992, Hua Da advanced to China East the total sum of $20 million. The initial advance, in the sum of $8.5 million, was made on 22nd May and there were four subsequent advances totalling $11.5 million.

5. The plaintiff's case is that the advances were made in connection with Vaxholm's proposed development of the Caroline Hill Road site, and that China East received the sums on behalf of Vaxholm. It is said that in May 1992 Mr Wong and Mr Deng and others met in Macau, and there Mr Wong proposed that the plaintiff should lend this money to Vaxholm at an attractive rate of interest, a loan which was to be secured on Hiyanan's 65% shareholding in Vaxholm. The idea found favour with the plaintiff, and the defendant company, Johnson, Stokes & Master ("JSM"), a well-known firm of solicitors in Hong Kong, were then engaged by the plaintiff in connection with the loan. I deliberately, at this juncture, use the broad phrase "in connection with the loan" because the boundaries of the defendant's retainer are disputed.

6. On 20th May 1992, Mr Deng was introduced to Mr Paul Yu, a partner of JSM. They met again on 21st May and 22nd May, and it is common ground that on 22nd May 1992 a number of documents were signed by Mr Wong and Mr Fok, in the presence of Mr Deng, at the offices of JSM and that a cashier's order in favour of China East in the sum of $8.5 million was handed over to Mr Wong.

7. The documents signed included a share mortgage prepared by JSM, by which Hiyanan agreed to pledge its shares in Vaxholm as security for the advance by the plaintiff to China East in the sum of $8.5 million. By that agreement, Hiyanan agreed to deposit with the plaintiff share certificates representing its holding in Vaxholm, and undertook to execute such transfers upon request and to procure such consents as may be required to perfect Hua Da's title in the shares. The security was enforceable upon default of payment when due, and Hiyanan and China East warranted that they had the capacity to execute the share mortgage and to perform their obligations under it. By a further document, China East acknowledged its indebtedness to the plaintiff in the sum of $8.5 million with interest at the rate of 3% per month, the principal plus interest repayable on demand, and in any event no later than 22nd August 1992. Then there was executed a guarantee by Mr Wong and Mr Fok in favour of the plaintiff.

8. However, before these documents were executed, Mr Wong and Mr Fok did not deliver the share certificates. The loan nonetheless proceeded, and there were executed further documents :

(1) an undertaking by Hiyanan, Wong and Fok that the shares were free from incumbrances and that the certificates would be delivered within a month; and

(2) two letters conferring a charge over China East's and Crystal Finance's respective shareholdings in Hiyanan.

9. After 22nd May, Hua Da advanced further sums, in several stages, to China East and by 18th August 1992, the plaintiff had advanced to China East a sum, including the original advance in May, totalling $20 million.

10. But at no time were the share certificates delivered. Nor was the amount of the loan or any part of the interest ever repaid.

11. It transpired that well before the plaintiff had lent monies to China East, Hiyanan had borrowed $20 million from another company, a Hong Kong company called Scoot City Ltd., and as security for that loan all the shares in Vaxholm, not merely Hiyanan's 65% portion, had been pledged to Scoot City, and it was to Scoot City that the share certificates had been delivered. This prior loan had been advanced in January 1992, and the shares had been pledged in March 1992. A number of companies guaranteed that loan, amongst them one called Nicemate Co. Ltd. ("Nicemate"), and another called Gainfast Development Ltd. ("Gainfast"). But Hiyanan failed to repay the loan by the due date, and Nicemate was pressed to honour its guarantee. A company called Grand Easy Development Ltd. ("Grand Easy") was then formed as a subsidiary of Nicemate for the purpose of acquiring Vaxholm's shares, and what happened was that on 10th April 1992 Scoot City assigned its rights and interests in respect of the loan and the share pledge to Grand Easy.

12. So, by the time of the loan agreement of 22nd May with Hua Da, Hiyanan was already indebted to Grand Easy in the very sum which Hua Da was going to lend, and the share certificates which Mr Wong and Mr Fok were going to deposit with Hua Da were not within their control to deposit. They were with Grand Easy. And that was the state of affairs by the time the plaintiff came into the picture in April and May, unaware, says Mr Deng, of all that had gone on before and, in particular, unaware of the prior pledge of the shares.

13. In December 1992, Grand Easy exercised its rights under the charge thus assigned by effecting the resignation of Mr Wong, Mr Fok and others as directors of Vaxholm, and by effecting the transfer of the entire issued share capital of Vaxholm to Nicemate and Gainfast to hold on behalf of Grand Easy.

14. In 1993, Vaxholm entered upon a sale and purchase agreement for the sale of the Caroline Hill Road property and it was sold for $140 million. There was a charge on the property in favour of the First Pacific Bank, a charge which had subsisted from before the loan by the plaintiff to China East.

15. The plaintiff then instituted proceedings in an attempt to stop Vaxholm from disposing of the proceeds of sale of the property. That action was settled, and by one of the terms of settlement, Grand Easy agreed to transfer its shares in Vaxholm to Hiyanan, who in turn agreed to transfer them to the plaintiff.

16. But the transfer to the plaintiff was not effected, so the plaintiff started a second action by which it sought specific performance of the settlement agreement. That second action was also settled, and by that settlement Grand Easy undertook to cause its shares to be transferred to Hiyanan, its nominees to resign from Vaxholm's board and it was envisaged that the share certificates would then be transferred to the plaintiff. The plaintiff obtained the share certificates, but when the plaintiff sought to have the shares transferred into its own name, Hoffman, the minority shareholder, refused to consent to the registration of that transfer to the plaintiff, a refusal which was within its power, pursuant to the provisions of Vaxholm's Articles of Association.

17. So the plaintiff was in no position to exercise any control over Vaxholm, thereby to retrieve any part of the balance of the proceeds of sale of the Caroline Hill Road property.

18. In the meantime, China East had been wound up pursuant to a creditors' petition.

19. In the result, the plaintiff failed to recover the loan of $20 million, or any part of it, or the interest due.

These Proceedings

20. In December 1995, the plaintiff instituted these proceedings against the defendant. The action is in contract and tort, and the assertion is that the defendant failed in its obligation to exercise all due care, skill and diligence in rendering to the plaintiff the professional services for which it was engaged.

21. Amongst the many contentious issues is the scope of the retainer. The plaintiff says that JSM was instructed and agreed :

(a) to verify a number of representations made by Mr Wong to Mr Deng, namely, that Mr Wong was a director of Vaxholm; that he and Mr Fok through Hiyanan, China East and Crystal Finance, held 65% of the shares in Vaxholm; that Vaxholm was the registered owner of the property at Caroline Hill Road; that that was Vaxholm's sole asset; and that Vaxholm was then under financial pressure; and that there was outside interest in buying the plot for over $120 million;

(b) to advise upon the feasibility of the structure of the loan;

(c) to advise on the adequacy of the proposed security;

(d) to draft and prepare a share mortgage to give effect to the security; and

(e) to act for and advise the plaintiff throughout the transaction.

It is said that the defendant was aware that the plaintiff was inexperienced in conducting business dealings in Hong Kong and in the provision of loans and in obtaining securities for such loans.

22. The allegations of negligence and breach of contract are these :

(1) that the defendant failed to advise on the adequacy of the security - in particular that the defendant should have, but did not :

(a) advise the plaintiff to conduct investigation as to the financial stability of Vaxholm;

(b) advise the plaintiff to obtain a valuation of Hiyanan's 65% shareholding;

(c) conduct a search in the Companies Register of Vaxholm's Articles;

(d) advise the plaintiff in the light of the information which would then have been revealed, not to proceed with the transaction, because of Vaxholm's substantial liability and the limitation in the Articles against transfer of the shares without Vaxholm's consent or after the same were first offered to Hoffman for sale.

(2) failed to advise on the structure of the loan, in particular that the defendant should have advised the plaintiff not to make the loan to China East but to Vaxholm, and to obtain a guarantee from all Vaxholm's shareholders pledging all their shares;

(3) failed to advise on the priority of successive pledges or mortgages;

(4) wrongly advised the plaintiff that even if the share certificates were not handed over, as to the knowledge of Mr Yu they were not, its interests were nonetheless protected by the undertakings given by Wong and Fok to do so;

(5) failed to advise the plaintiff of the importance of obtaining the share certificates in order to have an effective mortgage over the shares; and

(6) failed to advise the plaintiff not to make any advance until the share certificates were handed over.

23. The plaintiff's claim, as pleaded, is in the sum of $45,100,000 which represents the loan of $20 million plus interest at the contractual rate to December 1995; plus $47,880 which represents JSM's charges for the services they say they rendered.

24. The Defence is broadly to this effect : that JSM was engaged to draft and prepare the share charge and to provide legal advice to the plaintiff "in respect of the drafting and preparation of the charge". It is accepted that there is implicit in that retainer the further obligation to provide advice incidental to the undertaking. They deny that they were asked or agreed to verify representations allegedly made by Mr Wong to Mr Deng, or to advise on the feasibility of the structure of the loan, or as to the adequacy of the security. The defendant's case, as pleaded, is that they did in fact conduct company searches and a land search, and that they did offer certain advice to the plaintiff - in particular, that the value of the share mortgage would amount to only 65% of the residual value of the company; and that it was important to obtain up-to-date financial information about Vaxholm's assets and liabilies; and that as Vaxholm was a private company, it might be difficult to realise the Vaxholm shares.

25. As for the failure to secure delivery of the share certificates, it is contended by JSM that Mr Deng was expressly told that it was very important to obtain them in order to secure a valid share mortgage, and that the transaction should be postponed until the certificates were produced, but that nonetheless Mr Deng was very keen to proceed at once, wherefore he was advised to obtain the dubious benefit of undertakings to produce the certificates and a charge over the shares in Hiyanan owned by China East and Crystal Finance.

26. The allegations and counter allegations did not end there, for early during the hearing itself there was an application by the plaintiff to amend the Reply, an application prompted by my question to plaintiff's counsel whether it was accepted that if the defendant's account of events was accurate, no breach or negligence was shown. The response to my question, which response is now reflected in the amendments which I permitted, was that even so, the solicitors were negligent in failing to advise that the articles of association placed a severe restriction on the right to foreclose the shares, failed to advise on the desirability of obtaining the authority necessary to sign documents and attend meetings and to exercise the rights as a shareholder of Vaxholm; failed to advise that the plaintiff should sound out the directors of Hoffman about the prospect of registration of the plaintiff as a shareholder; failed to advise on the desirability or need to obtain a legal mortgage of the shares; failed to advise that audited and management accounts of Vaxholm, Hiyanan and China East might readily be obtained from Wong and Fok; failed to tell Mr Deng that the mortgage effected could not prevent Vaxholm or Hiyanan or China East from incurring new liabilities; failed to advise him to obtain a suitable undertaking about the future application of funds or upon the giving of further security on its assets; and in relation to the failure to produce the share certificates, failed to make such enquiries as he should have made from the firm which was said to have the share certificates, and failed to advise that there was a distinct possibility that the shares were subject to a prior charge or mortgage.

The Law

27. The following principles of law are particularly germane :

1) A retained solicitor owes a duty to his client, both in contract and tort. There arises, when a solicitor is engaged for reward, a contractual duty to exercise skill and care on behalf of his client. A solicitor is not expected or bound to know all the law, nor is he to be judged according to the standard which might be demonstrated by "a particularly meticulous and conscientious practitioner". (See Midland Bank v. Stubbs & Kemp [1979] Ch 384, at 403.)

2) The duty of a solicitor is "to exercise that reasonable degree of skill and care to be expected of a competent and reasonably experienced solicitor" (Clerk and Lindsell on Torts, 17th Ed., para 8-81). "The test is what a reasonably competent practitioner would do having regard to the standard normally adopted in his profession." (See Midbank Bank, supra, at page 403.)

3) "If in the course of taking instructions a professional man like a solicitor learns of facts which reveal to him as a professional man the existence of obvious risks then he should do more than merely advise within the strict limits of his retainer. He should call attention to and advise upon the risks." (per Lawton LJ in Boyce v. Rendells [1983] 268 E.G. 268 at 272.)

4) Where a solicitor is asked to advise upon one matter then, as a general rule, he is not obliged to advise on different points though related, unless the connection is so close and reliance placed in the solicitor to advise generally so obvious, that advice on related points may be required. (Clerk & Lindsell, supra, para 8-89.)

5) The duty of a solicitor might be affected by the experience or inexperience of the client, in the sense that a client inexperienced in the field in which he seeks advice is "entitled to expect the solicitor to take a much broader view of the scope of his retainer and his duties than will be the case with an experienced client." (See Carradine Properties Ltd. v. D.J. Freeman & Co. (1985) 1 P.N. 41.)

6) "The standard of care to be expected of a professional man must be based on events as they occur in prospect and not in retrospect." per Simon Brown LJ in Martin Boston v. Roberts and others, The Times, 17 March 1995, who then cited Duchess of Argyll v. Beuselinck [1972] 2 Lloyd's Report 172 at 185 :

"In this world there are few things that could not have been better done if done with hindsight. The advantages of hindsight include the benefit of having a sufficient indication of which of the many factors present are important and which are unimportant. But hindsight is no touchstone of negligence."

7) A solicitor is not, in the absence of unequivocal instructions and acceptance by him to do so, expected to advise upon the commercial good sense of a business proposition, whether he should or should not, as a matter of commercial advantage, proceed with a transaction, whether a transaction is or is not good business or prudent, although where it is evident that a client relies on the solicitor for more than legal advice, the solicitor may be under a duty to refer the client to an appropriate source or sources of information. (See Yager v. Fishman & Co. [1994] 1 All ER 552; Reeves v. Thrings & Long [1996] PNLR 265; Clark Boyce v. Mouat [1994] 1 AC 428). Indeed, "it is in general the client's privilege if he so wishes to mismanage his affairs. He is entitled ..... to lend on insufficient security, or to enter an unwise bargain if he so chooses. The solicitor has a duty to advise on the legal hazards of the transaction, but no more :

'It was the duty of the solicitor to inform and advise, ensuring that the information and advice was understood by the client. It was not part of his duty of care to force his advice on the client.'

If that advice is disregarded he must carry out the client's instructions or else determine the retainer". (Jackson & Powell on Professional Negligence, 4th Ed., para 4-92, citing Duytfield v. Gilbert Stephens and Sons [1988] 18 Fam Law 473.)

8) "The onus of proving professional negligence over and above errors of judgement is a heavy one." (See Rondel v. Worsley [1969] 1 AC 191.)

The Evidence

28. An order was made at an interlocutory stage that witness statements served and filed by the parties should stand as evidence in chief at the trial, unless the trial judge directed otherwise. I was invited by counsel for both parties to make a contrary direction. Given that so many of the facts were in dispute and that recollection and credibility were so important in this case, it was, I concluded, necessary to hear the witnesses in full in chief, as well as in cross-examination, and, at the invitation of counsel on both sides, I made an order accordingly. For much the same reason, namely, because the case depends so heavily upon a resolution of disputed facts, of which there are so many, and given also that the claim is put on the alternative basis, now, that even the advice which JSM say they gave was negligent, I have embarked upon a somewhat full rehearsal of the contending cases.

1. The proposed deal

29. Mr Deng Hong lives in Foshan City. He is, and was, General Manager of the plaintiff company, and also Deputy Director of the Second Light Industry Bureau of the Foshan City Government Department. The plaintiff company is owned by that Bureau. Hua Da, in 1992, owned factories, travel agencies, karaoke establishments and hotels, and engaged generally in trade. Mr Deng described himself as an economist, with tertiary education in industry and in enterprise management; and with some 10 years experience in conducting investments and business.

30. At the beginning of 1992, the plaintiff was in a strong financial position with cash in hand, and it was thought that business should be developed elsewhere, namely, in Macau and Hong Kong.

31. In May 1992, Mr Deng and some colleagues from the plaintiff company travelled to Macau where a former Hua Da colleague, a Mr Wu Chi Wah, introduced Mr Deng to Mr Wong Siu Ling. The meeting was pre-arranged, and it appears that the trip was made specifically for the purpose of meeting Mr Wong and discussing a proposition which he wished to advance.

32. Mr Deng's evidence was that Mr Wong told him that he, Wong, was a director of Vaxholm which owned this land in Caroline Hill Road, a good piece of land at a very good location which was suited to development, worth a great deal, but that Vaxholm was in financial difficulties, indebted to the First Pacific Bank in the sum of $73.5 million, and that if loans and interest were not repaid, the bank would auction the land. If the plaintiff could supply Wong with starting capital, the land could in due course be sold at a good price and there would be something in return. The starting capital he needed was $20 million. It was a matter of urgency. What was needed was $8.5 million to pay instalments due to the bank within a week, or a little more than a week; and then there would be required a further sum of $4.5 million to erect boarding around the site and to employ workers, and then he would require more loans from banks. He said that the loans from the plaintiff, if made, would be repaid within three months, and interest on the loan would be 3% per month. He estimated that the property could be sold for $130 million. He also told Mr Deng about the structure of the companies, that is, Vaxholm and Crystal Finance, China East, Hiyanan and Hoffman; and about his and Fok's ownership of Hiyanan, and Hiyanan's 65% shareholding in Vaxholm. What was proposed was that as security for the loan there would be offered Hiyanan's shareholding in Vaxholm. The loan, however, was not to be made to Vaxholm, even though it was Vaxholm that required the advance. It would be made to China East, and Wong gave as the reason for that that he did not wish to damage Vaxholm's credit worthiness by taking out another loan in Vaxholm's name.

2. Reaction to the proposal

33. According to his own testimony, Mr Deng did not ask, either then or later, to see any documentation supporting the suggestion of indebtedness to a bank, the urgent need for the money, or any documentation to show the cost of the proposed hoarding, or indeed that any hoarding works had been commissioned; nor did he ask for, nor was he shown, any paper which evidenced tax due (for there was a suggestion that some tax was due), nor, so far as I can tell, did he seek to ascertain precisely how it was proposed that the money could be repaid within as short a period as three months.

34. Mr Deng said that there then took place a discussion in Macau between Mr Deng and his colleagues, and the resolution was this :

"We lend $20 million to Wong. We would have 3% interest per month and 65% shares of Vaxholm as security and would receive rich benefit and this would be a golden opportunity to develop business in Hong Kong."

35. They were invited to go to Hong Kong to view the property, which they did. Whilst still in Macau, a Mr Chan of the Agricultural Bank of Foshan City advised them that the plaintiff knew nothing about Hong Kong, they should retain a competent lawyer "to help you monitor your business in Hong Kong". They came to Hong Kong. They inspected the site, and Mr Wong, it is said, provided them with a feasibility report on the land. The project in mind was a hotel and residential development. Mr Wong told Mr Deng to retain lawyers "to have matters verified".

36. Later the same day, Mr Wong took Mr Deng to Deacons, another eminent firm of solicitors in Hong Kong, and there he was introduced to a Mr Lam, a solicitor. Mr Lam told him, with the aid of a diagram, about the company structure, the loan from First Pacific Bank and that the land was worth more than $120 million. In short, he verified or confirmed much or all of that which Wong had told Mr Deng in Macau - he confirmed Wong's account of his directorships and shareholdings in Vaxholm, China East and Hiyanan; about the structure of the various companies; the manner in which the money would be advanced; and that there was an outstanding loan in the sum of $73 million.

37. That evening, there was a dinner given by Wong and Fok attended by Mr Deng and his party, during which the loan was raised again for discussions, and Mr Deng's evidence was that he told them that no decision had been made - they had first to retain a lawyer and that "everything would be handled by the lawyer".

3. Retaining JSM : The meeting of 20th May 1992

38. The defendant firm was recommended to Mr Deng by Mr Chan of the Agricultural Bank as a very professional and collosal firm. On 20th May, Mr Deng and a colleague, Mr Lai, and Mr Chan and Mr Chan's assistant, Mr Hui, went to the offices of JSM. There they were introduced to Mr Paul Yu Ga Hong, a partner in the plaintiff firm.

39. Mr Yu was admitted as a solicitor in 1985, so that by 1992 he had seven years post-qualification experience. He had been made a partner of the firm in April 1989. Since qualifying, he had specialized in conveyancing and property related loans and mortgages, and in the course of his work has acted in a large number of loan transactions, including share mortgage transactions, and his clients have included large banking clients. Before 1992, he had acted for the Foshan Agricultural Bank and knew Mr Chan of that organization. Another company managed by Mr Chan was a Hong Kong company called Star Glory, and it was that company that introduced Mr Deng to JSM, through Mr Hui, whose name features from time to time in the documents. Mr Deng was often out of Hong Kong and, according to Mr Yu's evidence, instructions were given for JSM to contact Hui in Mr Deng's absence.

40. At the first meeting with JSM, says Mr Deng, he told Mr Yu all that had thus far transpired and he asked him :

(1) to verify that which Wong had told him about the structure of Vaxholm and the ownership of the land;;

(2) to provide his opinion whether it was suitable for the plaintiff to use a Macau company called Ka Dak Bo (嘉德寶) as the lending vehicle for the loan of $20 million. Ka Dak Bo was a company registered in Macau with which company the plaintiff had had dealings in the past;

(3) whether it was safe or not to lend $20 million to Vaxholm with only 65% of Vaxholm's shares as security;

(4) to carry out the legal documentation work; and

(5) to take whatever follow up action Mr Yu deemed fit.

41. He contends that Mr Yu was well aware that $20 million was the amount to be lent but that a sum of $8.5 million was the sum that was needed very urgently. Mr Deng adds that he brought to Mr Yu's attention that he was inexperienced in Hong Kong and in how matters were conducted here.

42. The point of retaining JSM was, says Mr Deng :

"To have the matter verified, to see if we should go ahead with this business or not. I had a very clear opinion from JSM saying it's worth doing this business."

The suggestion that JSM said that the business was worth doing was a refrain, a hallmark, of Mr Deng's evidence. At the end of the meeting, he asked Mr Yu for a letter of instruction, and he made that request because, according to practice on the Mainland, if lawyers were retained, they were required to issue a letter of instruction. Mr Yu promised to prepare one, and one was prepared and handed to Mr Deng at the next meeting, which was the following day, 21st May.

43. Mr Yu's account of the meeting is markedly different. He asserts that Mr Deng told him about Wong and Fok, and about the redevelopment property at Caroline Hill Road and about the proposal to lend money. Mr Deng told him that he and Mr Wong had a very good relationship; Mr Wong had assisted Hua Da in the past and it was now the plaintiff's turn to assist Wong. Wong and Fok owned a 65% interest in the property. The plaintiff wanted to make an indirect investment in the property by advancing certain sums to China East. Wong and Fok were in immediate and urgent need of $8.5 million within a couple of days - they were in need of short term finance for the project; and might eventually require further sums amounting to $11.5 million, but that the terms and dates of that further advance had not yet been finalized. There was then a discussion about the difference between an investment, which depended upon the profitability of the company, on the one hand, and, on the other, a straight loan realisable whether or not the company made a profit; and Mr Deng confirmed that he (or, rather, the plaintiff) wanted to make a loan. There was then some discussion about China East and who owned it, and Mr Deng told Mr Yu that the security offered was the 65% shareholding in Vaxholm. Mr Deng explained his proposal with the aid of a manuscript note which he made during the course of the meeting. It is a note which was kept by the solicitors and, in short, shows two possible sources of a loan to China East, namely, Star Glory and Ka Dak Bo; or Star Glory and the plaintiff, Hua Da. The name Vaxholm does not appear on the paper, and the only figure written on the paper is $8.5 million.

44. Mr Yu says that at this first meeting, he also provided advice about Hong Kong money lending laws. At all times, he spoke to Mr Deng in Cantonese, which is Mr Yu's first language, and there was no difficulty in communication between them. He did not know whether Mr Deng had, or had not, previously conducted business in Hong Kong; and adds that at the time it was fairly common for Mainland companies to invest here. The conclusion of the meeting, according to Mr Yu, was that JSM was to prepare legal documents for the share mortgage of 65% of shares in Vaxholm, and that the transaction was first to focus on the $8.5 million which was urgently needed. There was no request to verify information. Nonetheless, Mr Yu did conduct, or caused to be conducted, searches : land searches and company searches, which, he says, are relevant in the course of preparing the mortgage in the sense that the majority, or only, asset of the company, in respect of whose shares the mortgage was to be prepared, was the piece of land, and Mr Yu wished to verify ownership of that land. There was no instruction to consider or advise upon a loan to Vaxholm as an alternative to China East. Indeed, there was no suggestion of a loan to Vaxholm. Nor did Mr Deng ask JSM to advise on the suitability of the proposal : whether it was suitable to do this business or not. Had he been asked to make enquiries about the financial position of the companies, he would not have accepted that task but would instead have advised where such enquiries might be made; that land values could be obtained from a valuer, and advice about the financial health of the companies from an accountant. Had Vaxholm been suggested as the true borrower, the solicitors would, says Mr Yu, have proceeded on that basis and sought authorization or evidence of authorization from Vaxholm for the borrowing. Mr Deng asked the defendant to prepare a letter of instruction, and this Mr Yu did.

4. The letters of instruction

45. The instruction letter which was prepared and which Mr Deng signed on 21st May read as follows :

" Please be instructed to prepare a share mortgage over the shares of Vaxholm .... presently held by Hiyanan Co. Ltd., namely 65 shares representing 65% of the share capital of Vaxholm for securing an advance of $8.5 million to be made available by us to China East Investments Ltd."

This was signed by Mr Deng on behalf of Ka Dak Bo, and dated 21st May 1992. Mr Deng, when pressed in cross-examination, said that Mr Yu might have explained the contents of the document to him, but if he did so it was done very quickly and Mr Deng did not know English.

46. On 22nd May, there was signed by Mr Deng another instruction letter, intended to replace the first. It was different from the first only in that the lender was specified to be Hua Da rather than Ka Dak Bo, and the second letter contained an additional paragraph, which read :

"The intended advance to China East Investments Ltd. is for the purpose of our participating indirectly in the development project at the Caroline Hill Road property. We are not carrying on any business of money lending nor do we have any intention to carry on such business. We acknowledge having been advised that if we carry on money lending business in Hong Kong, a money lender licence will be required."

5. The meeting of 21st May 1992

47. This meeting was attended by Mr Deng, Mr Lai and Mr Hui, and, of course, by Mr Yu. The point of the meeting, says Mr Deng, was to obtain answers to the various requests that they had made the previous day, and Mr Yu gave them the assurances for which they had hoped, and said that JSM had spent a lot of manpower and money on certain searches concerning Vaxholm's structure and as regards Wong and Fok's background information, and that he could tell them that it was all basically true. Then some advice was tendered about money lending laws in Hong Kong.

48. As for the proposed loan, it was, according to Mr Deng, repeatedly stressed that the true lender was Vaxholm even though the recipient, in name, was China East; in other words that China East was to receive the sum on behalf of Vaxholm. Mr Deng asserts that there were in fact two meetings on 21st May.

49. Mr Yu says that the purpose of the meeting on 21st May - and he says that there was only one - was to explain the proposal to Mr Deng with the benefit of the searches which had been carried out. To this end, he, Mr Yu, prepared a chart which showed the company structure, and he says that he had jotted down some notes of points he was going to discuss. By the time of this meeting, he had the result of the land search and of the company search into Vaxholm, including the articles of association of that company. He had glanced at the articles before the meeting. Mr Yu says that he advised Mr Deng about the legal effect of the proposed share mortgage; that it was not a mortgage over the property, but in respect of company shares, the value of which shares would depend upon the residual value of the company at the time when they needed to sell the shares. He told him that it was important to assess the financial position of Vaxholm and that he, Mr Deng, should therefore obtain relevant information from Wong and Fok and in particular, he should obtain audited up-to-date accounts and that, further, he should satisfy himself about the financial position of China East, and that he should obtain personal guarantees from Wong and Fok. Mr Deng gave Mr Yu a report on the property at Caroline Hill Road which contained a valuation and a feasibility study. There was discussion, too, about the bank loan in favour of First Pacific secured by a first mortgage on the property. Mr Yu asserts that he told Mr Deng that there could be other liabilities. Then he advised that even if there were net worth in the company, nonetheless Vaxholm was a private company, and that if the need arose to sell or transfer the shares, they would have to negotiate with the minority shareholders, and that if the minority shareholders do not wish to buy, then a third party might be reluctant to buy in view of the need to co-operate with the minority shareholders. He says that he tendered this advice because this was a situation common to joint venture private companies. He adds that he also advised Mr Deng to ascertain whether there existed a shareholders' agreement. The following day, Mr Deng told him that there was none.

50. Mr Yu also raised the possibility of a second mortgage in respect of the property. He explained that this would require the consent of the First Pacific Bank, which proposal would require discussions with the minority shareholders, and it was agreed that that prospect should not be pursued. There was also discussed the possibility of an assignment of shareholders loans. There was debated the question about the lender and who that should be, and it was decided that the lender should be Hua Da. So the letter of instruction was changed accordingly.

51. Mr Yu says that he remembers asking Mr Deng if he, Mr Deng, wanted the shares transferred to the mortgagee's name before the advance was made - a question, he says, he normally asks of clients, but told him that that would require the consent of the minority shareholders before the next day. If that could be obtained, that would be the preferred course, for it would make sure that the shares could be transferred into the plaintiff's name. The practicalities might make this course difficult to achieve in time. The alternative was to obtain the share certificates, and for the mortgagor to sign an instrument of transfer which would enable him to request transfer of the shares at any time, but that that would be subject to obtaining the consent of the minority shareholders in due course. He advised Mr Deng to try and sound out the minority shareholders whether it was possible for there to be reached an understanding or an agreement in principle, and he should assess how confident he was that he would be able to negotiate with them in the future. Mr Deng decided, according to Mr Yu, that he would not require an immediate transfer, and Mr Yu had the impression, he says, that that was a matter upon which Mr Deng had already made a decision.

52. The matter was left, as between adviser and client, on the footing that JSM would prepare the legal documentation to be ready for signing the following day, that Mr Deng would carry out his financial assessment and discuss matters with Mr Wong and Mr Fok, and to bring them to the office the next day so that Mr Yu could explain the documents to them and they could sign them.

53. Mr Yu then instructed an assistant solicitor to prepare documentation.

54. Overnight, Mr Yu had obtained further information about some of the companies, particularly about China East. He cannot now remember the source of the information although he thinks it was either Mr Deng or Mr Wong.

6. The meetings of 22nd May 1992

55. Mr Deng asserts that on 22nd May there were again two meetings, and Mr Yu agrees.

(i) The morning

56. In the morning, advice was tendered by Mr Yu to the effect, according to Mr Deng, that there was no reason why Hua Da's name should not be used as the lender on the loan documentation, advice which the plaintiff accepted; and then there was signed by Mr Deng on behalf of the plaintiff the second instruction letter.

57. Mr Yu says that the morning meeting was attended by Mr Deng, Mr Wong and Mr Fok. He explained the substance of the documents to the three visitors, and that Mr Wong and Mr Fok would have to bring along that day the original share certificates, and the company seal, as well as certain company documents, such as a copy of the articles of association, and he particularised the documents which would have to be signed that day. He says that he gleaned the impression that Mr Deng was listening to the explanation which he gave, an explanation delivered in Cantonese. The fresh letter of instruction was signed, but Mr Yu cannot recall now whether that was signed in the morning or in the afternoon.

(ii) Afternoon : Non-delivery of the certificates

58. That afternoon there took place the final meeting at the offices of JSM, at which the loan documentation was to be signed. It is common ground that it was expected by Mr Yu that Mr Wong and Mr Fok would attend that meeting, bringing with them the share certificate, or certificates, evidencing Hiyanan's shares in Vaxholm, and that Mr Yu had said that that is what they were to do.

59. Mr Deng's case is that the conversation that afternoon was in the main between Mr Yu on the one hand, and Mr Wong and Mr Fok on the other, Mr Yu apparently explaining the documents to those two men. He says he could not understand much of what was going on because some of the conversation was in English, and asserts that Mr Yu explained none of the documents to him. It transpired, however, that Mr Wong and Mr Fok had not brought with them the original share certificate, although they brought a copy. When Mr Yu pointed out that that was only a copy, and Mr Wong and Mr Fok responded by alleging that the original was in the possession of Mr Robert Lee, solicitor of Deacons, who was however away on leave for a month. All this, said Mr Deng, caused him considerable worry, although he was prepared to rely on the lawyer's advice. He saw that Mr Yu was in deep discussion with the two other men, and he saw the two men produce original certificates of other shares, although he did not know what they were. Then Mr Yu told him that the three of them had reached a consensus, which was that Wong and Fok would surrender the shares of China East and Crystal Finance in Hiyanan as security, and that they would further guarantee that they would produce the original share certificates in Vaxholm within a month. Mr Yu then said to Mr Deng :

"I have their personal guarantees. It's very safe then. It's fortified. You can set your mind at ease - if there are to be any legal proceedings, you are a certain winner."

Mr Deng attests that he completely trusted Mr Yu and, there being no residual doubt then in his mind, he gave the cheque for $8.5 million to Mr Yu, who in turn handed it to Wong and Fok.

60. So Mr Deng's evidence amounts to this : that what JSM in fact did was to verify the structure of the companies, and the ownership of the land, advised that the lender could be Hua Da rather than Ka Dak Bo, prepared certain legal documents, and advised about Hong Kong's money lending laws. But his case is that Mr Yu offered no precautionary advice whatsoever; that he said nothing about the value of the security being the residual value only of Vaxholm at the time the liability was in force; said nothing whatsoever to the effect that it might be difficult to realise the shares even if they had some net worth. He said nothing at all to the effect that the plaintiff should make sure that China East was credit worthy; gave no hint that the plaintiff should seek financial statements about Vaxholm or any of the related companies; did not tell them about the loan to First Pacific Bank; did not warn them that there might be other loans outstanding to Vaxholm; offered no advice about alternative or further forms of security; said nothing about the value of the land at Caroline Hill Road, at least not in terms of stating a specific value ascertained; and in particular, when the share certificate was not produced did not sound any note of warning, nor take Mr Deng aside to discuss this unexpected turn of events. On the contrary, according to this version, Mr Yu comforted and calmed Mr Deng's reservations and worries and told him that the deal could be done. In the event, the plaintiff company relied entirely upon the positive advice by Mr Yu that the venture was safe, without themselves ever seeing any financial statements of any of the relevant companies, any valuation of the land, any management accounts, any audited accounts, any information about the assets of the companies, and it was never suggested that they should obtain such information. Mr Deng knew precisely nothing about the assets of any of the companies save for the one fact that Vaxholm owned the land at Caroline Hill Road and was indebted to the First Pacific Bank in the sum of $73.5 million. But Mr Deng's case amounts to more than that for he says that Mr Yu undertook to verify statements which had been made by Wong - for example, as to the value of the land - and then represented that he had done so; whereas we know from Mr Yu that in certain aspects (e.g. as to land value) no such verification by Mr Yu took place.

61. Mr Yu's evidence about the events of that crucial meeting are somewhat different. The meeting started at 3 p.m. or shortly thereafter, and very soon after the meeting commenced, Mr Yu asked for the original share certificate. It was not produced. Only a certified copy was produced. He, Mr Yu, asked where the original was and was told that it was with Deacons, and he asked that it be fetched, but was told by Wong that the lawyer handling their affairs at Deacons, Mr Robert Lee, was on leave. Mr Yu pressed the matter, asking whether there was another lawyer who could locate the original, and Mr Wong said that since Mr Lee personally handled their affairs, there was none else who could help in such little time.

62. Now Mr Yu says that he was very concerned about this turn of events, and he took Mr Deng out of the board room to talk to him privately. Mr Deng says that no such thing happened at all. Mr Yu is insistent that he took Mr Deng to a small meeting room near the board room and told him that the original share certificate was a very important document and that he should await its delivery before completing the transaction and before making the advance. Without the share certificate, the security arrangement was not complete and without it he, Mr Deng, would not obtain the security which was intended. All this was explained to Mr Deng in Cantonese and Mr Deng appeared to acknowledge its importance, but was nonetheless very keen to conclude the matter that day before the bank closed. He asked Mr Yu to do the best he could to think of some method which could complete the transaction that day. The bank closed at 4:30 p.m. and the funds were needed by then, and the problem about the missing original share certificate was discovered and discussed at about, or shortly before, 4:00 p.m. Mr Yu says that he then told Mr Deng that if he insisted on proceeding that day, he would not be sure to get the security he intended, but that what Mr Yu could do was to obtain a share mortgage over the issued shares in Hiyanan, since Wong and Fok had brought with them the original share certificates in that company, and would propose that there be signed some sort of undertaking by Wong and Fok to deliver the original share certificate in Vaxholm within a specified period. He also explained that although the loan was guaranteed by Wong and Fok, Mr Deng would need to trust that they had the resources to repay the loan, and that they would honour their obligation to deliver the share certificate. Mr Deng instructed Mr Yu to proceed on the basis which Mr Yu had outlined. Mr Yu denies that he gave any comfort at all to Mr Deng about the proposed deal, or about proceeding without the original share certificate. When pressed in cross-examination that it would have been possible for Mr Yu to telephone Deacons and ascertain whether the certificate could be found, Mr Yu's response was that there were many things to be discussed at the meeting. He had explained the position to Mr Deng and there was no time to do anything of that sort. There was left only about 20 to 30 minutes in which matters were to be concluded if they were to be concluded that day. Mr Yu had an assistant, but the assistant was fine-tuning the documents which were to be signed. There had also to be prepared some further documents to cover the additional undertaking now proposed and the additional security in respect of shares in Hiyanan. He cannot remember whether he told Deng that the absence of the share certificates could mean that they had previously been mortgaged.

63. That the atmosphere was one of anxious ridden rush is supported by the evidence of Mr Vincent Lau, the solicitor assisting Mr Yu in preparing the loan documentation.

64. According to Mr Yu, matters were left on the basis that there were to be further discussions between Mr Wong and Mr Deng about the terms and requirements of further advances, but Mr Yu says that he warned Mr Deng to wait for the original share certificate before finalising such advances, and that he, Mr Yu, would await Mr Deng's further instructions about such further loans.

7. The documentation of 22nd May 1992

65. It is common ground that there was signed at this meeting a number of documents :

1) An acknowledgement of debt signed by Wong and Fok on behalf of China East addressed to Hua Da. It acknowledges an advance of $8.5 million, the consequential debt which arose in that amount, the interest rate of 3% per month, and that the debt was repayable on demand, and in any event before 22nd August 1992. There is no mention in the document of Vaxholm as the lender.

2) A guarantee entitled "Guarantee of the Liabilities of China East Investments Ltd.". The guarantee is in favour of Hua Da by Fok and Wong and is in respect of the sum of $8.5 million. The breadth of the guarantee in its effect, as a matter of construction of the document, is a matter of some argument between the parties. The document recites the fact that Hua Da has agreed to provide an advance of $8.5 million on certain terms in consideration of which the guarantors guarantee :

".... until final payment has been made, the due and prompt payment by China East of the Guaranteed Indebtedness so that whenever China East fails to make payment of any Guaranteed Indebtedness the Guarantors shall forthwith upon demand by Hua Da .... pay .... the Guaranteed Indebtedness to Hua Da".

The 'Guaranteed Indebtedness' is defined in the guarantee document as :

"All moneys, obligations and liabilities which may from time to time be owing by or due from China East to Hua Da (including China East's obligation to repay the said advance of $8.5 million and interest to Hua Da)."

3) The share mortgage. The document recites the advance of $8.5 million to China East by Hua Da and the interest payable. There is no mention of the figure of $20 million. The shares to which the document is addressed are the 65 fully paid up ordinary shares in Vaxholm, registered in the name of Hiyanan, and the secured indebtedness is defined as :

"All moneys, obligations and liabilities which may from time to time be owing by or due from China East and/or the shareholder to Hua Da (including the obligations to repay the said advance of HK$8,500,000 and interest to Hua Da)."

Clause 2(b) provides that :

"In consideration of Hua Da agreeing, at the request of the shareholder, to make the said advance to China East, [Hiyanan] will whenever China East fails to make any payment to Hua Da, forthwith upon demand by Hua Da pay or cause forthwith to be paid to Hua Da the said sum of HK$8,500,000 and all other sums (if any) which are due and payable by China East to Hua Da, and interest thereon at the aforesaid rate."

Furthermore, by Clause 2(c), Hiyanan agreed to deposit with Hua Da share certificates representing its holding of all the shares which are also warranted to be within its disposition and control and free from any prior charge or incumbrance.

The share mortgage was accompanied by an instrument of transfer with blanks as to the identity of the transferee and dates, as well as a contract note, also with suitable blanks.

4) An undertaking by Mr Fok and Mr Wong stating that the 65 shares "are now free from any charge or incumbrance whatsoever and we shall deliver the original certificate to you within one month."

5) A short form charge on China East's shares in Hiyanan, with an accompanying instrument of transfer, and like documents to give effect to a transfer of Crystal Finance's shares in Hiyanan.

6) Minutes of a directors' meeting of China East authorising that company to obtain the advance of $8.5 million, acceptance of the loan, and to enter upon the share mortgage agreement.

7) Minutes of a directors' meeting of Hiyanan whereby the directors approved the share mortgage as security for the loan of $8.5 million.

8. Advances of the further sums

66. On 3rd June 1992, the plaintiff caused a cashier's order to be drawn on the account of Star Glory in favour of China East in the sum of $4.5 million. It was not handed over by JSM nor was JSM informed in advance that it was to be handed over that day. JSM was not asked to draw a receipt for the sum. The cashier's order was handed over by Mr Deng to Mr Wong. There was a receipt endorsed upon the cashier's order itself, signed by Foshan Hua Da Industrial Co. and Wong Siu Ling.

67. Mr Deng accepts that when he handed over the cashier order, he did not ask Mr Wong whether the share certificate had yet been handed over. He says that in mid June he had asked Mr Yu if he had received the original certificate but Mr Yu had said not yet although he had sent a letter pressing for its delivery and that he, Mr Deng, would be notified in due course.

68. JSM did indeed send a letter dated 3rd June 1992 addressed to China East, care of Star Glory, which referred to the share mortgage and the undertaking to deliver the original share certificates and asked for the delivery of those certificates as soon as possible, and also asked :

" For our client's records please let us also have latest audited accounts of China East, Vaxholm and Hiyanan."

Mr Deng says that he gave no instructions for that letter to be issued, nor for a letter in identical terms dated 9th June 1992 which was sent, but this time addressed to China East at their Sun Hung Kai Centre address, rather than at Star Glory's address in Tsimshatsui. Mr Yu, on the other hand, maintains that he and Mr Deng conversed on 3rd June, and Mr Deng was told then that the certificate had not been received by JSM and that is why the letter of 3rd June was written.

69. A file note which Mr Yu believes to have been made that day suggests that it was that day that Mr Deng talked of lending a further $11.5 million also repayable by 22nd August 1992. There is a further note on the file which Mr Yu believes to record a conversation on about 9th June with Mr Hui. It says this :

"Mr Hui was enquiring on behalf of Mr Tang. Advised him that it was important for China East to supply the requested documents (in particular the original share certificates) before advancing the balance. In the meantime, we can prepare the documents for the intended further advance."

70. On 11th June 1992, a further cashier's order in the sum of $1 million was paid to Mr Wong. Mr Deng says that Mr Wong had told him that the sum was needed to pay some government tax. Again, the cashier order was not handled by the solicitors, nor did they draw the receipt which was endorsed upon it, nor were they told of the specific advance.

71. 9th July saw the payment of a cheque drawn in the sum of $1 million. Some six weeks had passed since 22nd May and the certificates had not yet been delivered. Once more, JSM was not involved in the payment or delivery of the cheque or in the issue of the receipt for it. There is no suggestion that Mr Deng told Mr Yu that this payment had been made.

72. The last payment made by the plaintiff to China East was made a mere four days before the original $8.5 million was due for payment. This instalment was advanced by cashier's order dated 18th August 1992 in the sum of $5 million, this time made in favour of Deacons. Mr Deng's evidence in chief was that :

"By then as to the availability of the original share certificate, I did not know anything. On that day I thought Yu had already received the originals. What he had not done was that he failed to notify me."

Nor did Mr Deng ask Wong on this occasion whether the share certificates had been handed over.

9. The aftermath

73. There was no repayment in August or indeed later. Mr Deng asserts that in September and October he pressed Mr Wong for repayment, but in vain. So, in October, he went to see Mr Yu, and Mr Deng says that it was then that Mr Yu handed to him all the loan and allied documents signed on 22nd May. He continued in evidence :

"After we came by these documents, we had them translated and after some sort of comparison between the translation and the original documents, we discovered that Mr Yu was negligent on a very important part, that is, all along we talked about loans of $20 million, yet there was no acknowledgement of the receipt of $20 million at all."

74. Mr Yu insists that the first he knew that further moneys had been advanced was in October 1992 when Mr Deng consulted him and asked him to chase the default in repayment.

75. So Mr Wong was brought along to the offices of JSM and there, on 16th October, he signed on behalf of China East an acknowledgement of a debt of $20 million. The share certificates were still not delivered. Mr Wong told Mr Deng that Fok had the shares and that Fok was nowhere to be found. There was also issued, by a document of the same date, a demand note by which the plaintiff demanded that China East repay the $20 million within 15 days.

76. In November, or at about that time, according to Mr Deng's evidence in these proceedings, he discovered that the shares in Vaxholm had been pledged to Scoot City. He had ascertained this fact from a Mr Fung of Grand Easy. Mr Wong told Mr Deng that he and Mr Fok had cheated the plaintiff company. A report was in due course made, according to Mr Deng, to the Foshan City Government in 1993 but no report has ever been made to the police in Hong Kong. Whilst conclusive of nothing, the failure to report the matter to the police in Hong Kong is, I think, perhaps a little surprising after all this time, particularly given the large sum involved. Mr Wong is, as far as the plaintiff is aware, still in Hong Kong. It is, of course, still not too late for such a report to be made.

77. In February 1993, a document was prepared in Foshan City for Mr Wong's signature by which Mr Wong undertook to pass to the plaintiff within four days financial statements of Vaxholm, and to repay $23 million before 28th February. How it was thought that this might conceivably be achieved in time is far from clear.

78. Mr Yu claims that there were meetings towards the end of 1992 and in 1993 as well, and that he was suspicious that Mr Deng might have known before the initial advance in May 1992 that the shares had already been pledged, for in the course of a discussion in 1993 Mr Deng had said to him that he had known of the existence of an outstanding loan to a company other than First Pacific, and that Mr Wong had told him that Hua Da's money would be used to repay that loan.

79. There were no complaints about JSM's advice until the issue of these proceedings, and until then the complaint by Mr Deng and subsequently by his superior from Hua Da, was that they had been cheated by Mr Wong. By letter dated 3rd February 1994 JSM were advised by Messrs Ng and Shum, the plaintiff's present solicitors, that they had instructions to act in place of JSM in relation to the Vaxholm affair, and in March that year JSM was asked for the file. Nothing then was heard by, or suggested to, JSM until the issue of the writ in December 1995.

10. Expert evidence

80. The defendant company wished to place before me expert evidence, namely, that of a solicitor with considerable experience in Hong Kong in general corporate commercial finance and banking. The areas covered were these :

(i) What services he would expect to be offered or rendered to the client in a case such as the present by a reasonably prudent solicitor;

(ii) Whether the services in fact offered, if they accorded with the evidence of Mr Yu, fell below those to be expected of a reasonably prudent solicitor;

(iii) Whether there were obvious risks that fell for consideration in such a case; and

(iv) How a reasonably prudent solicitor might deal with the non-production of shares certificates.

81. Objection was taken to the admissibility of this evidence. It was said that the effect of the intended evidence was to say what he, the solicitor (Mr Chao), personally would have done rather than evidence about guidance to the profession or about profession-wide practice.

82. I decided to admit the evidence. I took the view that if a solicitor could address a question not by reference to what he himself would have done, but by addressing the risks and special considerations which common experience in a specialised field show are or are not revealed, then if it was an arena in which the court did not itself have expertise, the court could and should avail itself of the benefit of that experience, so long as the court did not, by the admission of the evidence, transfer the ultimate decision in the case to the expert. I concluded that it would assist the court to be told what checks were as a matter of prudent routine carried out, what risks were brought to mind, the options open in terms of advice which that experience dictates ought to be given, and so on.

83. In the event, and by the time the evidence was adduced, its utility was in fact less than I had at an earlier stage of the hearing anticipated - not because of any lack in Mr Chao's expertise, but simply because by the time he came to testify what was, and what would not be, prudent in the circumstances had become somewhat more self-evident. I note, too, that Mr Chao said that his opinions were based upon that which he would have done in the circumstances, but, that said, he added that that in turn accorded with procedures common to solicitors working in this field, a fact of which he was aware through working over the years alongside other solicitors similarly experienced, and through discussions with clients.

Findings

84. Where there is a conflict between the recollections of Mr Deng and Mr Yu, I generally prefer the recollection of Mr Yu despite the fact that Mr Yu did not keep attendance notes of some of the vital meetings, or of the most important advice which he gave to Mr Deng. I find that the account given by Mr Yu is to be preferred and that it broadly represents what in fact transpired. There are also a number of central matters upon which Mr Deng's recollection is contradicted by contemporaneous documents, or by earlier evidence, or by inherent probability.

85. I accept that the plaintiff had not previously conducted business in Hong Kong and that Mr Deng himself was unfamilar with the territory or its ways and unfamiliar with the conduct of financial transactions in this territory. That is, however, not to say that he is a naive man. On the contrary, Mr Deng is an intelligent man of firm disposition, who held a senior post in a large company with investments in many different businesses. He is a Cantonese speaker, and I am satisfied that there was no, or little, room for any misunderstanding between himself and Mr Yu.

86. It is important, so it seems to me, to bear in mind the atmosphere in which he first approached JSM, and the events which had immediately preceded that approach. Many mainland companies were then investing in Hong Kong in the property market, a market that was then doing very well. On Mr Deng's own evidence, the plaintiff company was anxious to introduce itself to that market and there was presented to it in May 1992, or in late April, an opportunity to invest in Hong Kong for a rich and quick profit. There is no evidence that the plaintiff company engaged in research or scanned the field or, if it did so, how extensive was its research. The fact of the matter is that the company was actively interested, well before it sought any advice from JSM, in lending a very substantial sum of money to a company which, on the plaintiff's own case, it knew to be in financial difficulty, not able to pay interest on its loan from the bank, so much so that the bank was threatening to foreclose within days if interest in the sum of $8.5 million was not repaid. Neither Mr Deng nor any other company official asked for any documentation from those who were seeking the funds, to support the suggestion of indebtedness to the bank, the urgent need for money, the cost of proposed works, the suggestion that there was tax due, or for any cogent evidence to show how it was proposed that $20 million was to be repaid within only three months. According to the evidence of Mr Deng, a decision was taken in principle, against that background, to lend money to Mr Wong and Mr Fok or to a suitable entity representing their needs; and before they (Mr Deng and his colleagues) went to see JSM they inspected the property in Hong Kong. What is more, they were prepared, as I find, to lend to a company which, as they well knew, did not itself own the land in respect of which the loan was purportedly required. The loan was not made to a stranger. Mr Wong was a figure with whom Hau Da had had connection in the past, although the evidence does not spell out what that connection was.

87. The picture which is presented has the hallmarks of men who were prepared to run a considerable risk in anticipation of a large and swift return. It is not a picture of a group engaged in careful research to ensure a safe return with well established reputable business partners.

88. The retainer was a narrow one and not the wide one for which the plaintiff contends. I am satisfied that by the time the plaintiff company approached JSM, it had specifically decided to advance $8.5 million within the next two or three days, and it had also been specifically decided, upon the express request of Mr Wong and Mr Fok, that the advance would be to China East and not to Vaxholm. The matters of verification about which Mr Deng may have been concerned were largely verified in a prior meeting with Deacons. When the plaintiff approached JSM, what Hua Da needed - or had decided that it needed - was to have prepared such documentation as was necessary to give effect to that proposed transaction, and perhaps to have incidental advice upon the best vehicle for the advance, by which I mean whether the sum should be advanced by Ka Dak Bo or by the plaintiff. I am satisfied that Vaxholm was never mentioned in May 1992 to Mr Yu as the borrower, or as the true borrower, or as China East's principal, and I further find that the advance in respect of which JSM were instructed to prepare mortgage and loan documentation was $8.5 million and not $20 million. I am further persuaded and find that Mr Deng did not require or instruct Mr Yu to verify information with which he had been provided, and that he did not ask JSM to advise whether the proposition into which the plaintiff company was immersing itself was safe. I find that Mr Yu did not tell the plaintiff company that they could set their minds at ease or that the plaintiff company's investment was safe or worth doing, whether in legal terms or otherwise, and in particular I find that the person who was truly concerned, and evidenced his concern, about the non-production of the share certificate(s) was Mr Yu. I find that he did take Mr Deng to one side and tell him that he should not go ahead until the certificate was produced but that Mr Deng was sufficiently anxious to proceed and was, wisely or not, sufficiently motivated to make the loan and sufficiently pressured by the factors of time, the presence of Mr Wong, and the desire to conclude the deal, that he decided to go ahead in any event and instructed Mr Yu to do so, asking him to come up with such lesser safeguards as he could. I find that Mr Deng did not, when further advances were made in June, July and August assume that the share certificates had been delivered; nor had Mr Yu given him cause to make such an assumption.

89. The purpose of going to JSM was dealt with by Mr Deng himself in an affirmation, not in these proceedings, but in former proceedings by the plaintiff against Vaxholm. There he refers to Mr Wong's wish for the loan to be to China East, and the reason advanced for that desire, and Mr Wong's assurance that it was Vaxholm that would repay.

"By reason of the favourable impression I and my colleagues had of Wong and the belief we had at the time that there was no particular risk involved by releasing the funds to China East qua agent for Vaxholm... we went along with Wong's proposal and agreed to the documentation of the loan being prepared on that basis." (emphasis added)

In that affirmation he then describes going to Deacons where :

"Mr Lam confirmed to me and my colleagues what Wong had said earlier of his directorships and shareholding in Vaxholm, Hiyanan and China East. He also confirmed to us that the loan would be advanced in the manner as suggested by Wong.... Wong suggested that the ... plaintiff should obtain the services of a solicitors firm for the purpose of preparing and exchanging the loan documents." (emphasis added)

90. This is not the only indication of the limited purpose for which the defendant firm was engaged. The purpose comes also from the instruction letters themselves. Neither party argues that the letters constitute the very terms of the retainer but in the context of this case, they are hardly unimportant documents. They were issued, not as a matter of course by the solicitors, but rather at the express request of Mr Deng. Mr Deng is a state official and it is understandable that he would wish to have a record of the terms of JSM's engagement and ensure that no unnecessary legal fees were incurred. Once it is accepted that the request for the document was his, I find it most unlikely that he would not then have studied the document upon its receipt to satisfy himself that in essence it stated the terms of JSM's engagement. The letters of instruction contain no request to verify information, to investigate financial standing or credit worthiness, or to advise upon the optimum structure of the proposed loan; but are in terms limited to the preparation of the mortgage.

91. So, too, it is noteworthy that the instructions refer only to a mortgage for securing the advance of $8.5 million and not $20 million. They refer only to China East, and there is no mention of Vaxholm. It is not the only contemporaneous document to refer only to China East and only to $8.5 million. The manuscript note in Mr Deng's handwriting at the meeting of 20th May, explaining to Mr Yu what was in essence required, refers only to a loan of $8.5 million and only to China East as the borrower. I also note that in his affirmation dated 3rd February 1994 in other proceedings Mr Deng said ― and this is echoed in a witness statement he has made in the current proceedings :

"The intended plaintiff was asked to provide an initial loan of $8.5 million with the understanding that further loans from the plaintiff would be necessary if the initial loan should prove to be insufficient...."

A request to JSM to prepare loan documentation for a loan of $8.5 million sits comfortably with this evidence, as does the common sense of the matter, for it is common ground that there was no agreement by 22nd May 1992 as to when any further sum was to be advanced or the date by which repayment of such further loans were to be made. So too is Mr Yu's recollection of the scope of the advance to be covered by the loan supported by his own file note.

92. Each of the documents signed by Mr Deng himself, or in his presence, in May 1992 at the office of JSM states the figure of $8.5 million and it is difficult to accept that their key content was not seen or brought to the attention of Mr Deng. The letters of instruction have that figure; the guarantee agreement has that figure; the share mortgage and the charge over the shares in Hiyanan, and the minutes of the relevant directors meetings each bear that figure.

93. I note that the sum of $8.5 million was handed over to the borrower by Mr Yu at the offices of JSM. Yet it is common ground that JSM was never again asked to play a role in the delivery of further sums advanced, nor to obtain receipts. Sums were handed over by Mr Deng or on his behalf directly to Mr Wong, and on none of these further occasions was JSM informed that the extra advance had been made, and on each of these further occasions it was Mr Deng who received acknowledgement of the loan. The last advance of $5 million was made only four days before the sum of $8.5 million was due for repayment, and Mr Deng accepts that he made no inquiry about the reason for the request that payment be made to Deacons, and made no inquiry whatsoever of Mr Wong himself as to whether or not the share certificates had been delivered. I note too that when these further sums were advanced, there was no request by Mr Deng or anybody else on behalf of the plaintiff company, as far as the evidence tells me, to verify that the moneys already advanced had been used for their advertised purpose or purposes.

94. Mr Deng says that he discovered in October 1992 for the first time that the documentation prepared by JSM in May 1992 was to secure and evidence a loan of $8.5 million rather than one for $20 million as he had always believed. By October Mr Wong had demonstrated, according to Mr Deng, reluctance or inability to repay the sums advanced, so concern in the plaintiff camp must then have been real. If, against that background, it then became a matter of surprise to Mr Deng that the solicitors, JSM, had obtained absolutely no security in respect of the balance of $11.5 million and had, in other words, ignored or completely misunderstood their original instructions, so that, as Mr Deng has put it in his evidence "Mr Yu was negligent on a very important part," one might have expected from a large state corporation a remonstration of explosive proportions. But there was none. The plaintiff made no complaint, and continued to use JSM as their solicitors until 1994. They even instructed JSM to draw further documents to seek to obtain some comfort or further chance of obtaining repayment.

95. Exactly what happened in the ranks of the plaintiff contingent and with Mr Wong and Mr Fok in the weeks beginning late April and early May 1992 and ending in August 1992 I am not, on the evidence which has been presented to me, able to say. I believe that I do not have the full picture, but it does seem that the plaintiff company was, at least, carried away by the temptation of a deal in Hong Kong and one which promised swift and large reward; trusting Mr Wong far too much, influenced to a degree, perhaps, by a sense of some obligation to help Mr Wong who had previously assisted Hua Da in some unspecified way, and who was introduced to Mr Deng by a former associate. What I am satisfied about, though, is that the role of JSM has assumed, in the mind of Mr Deng, and with the passage of time, a prominence which the firm never had. JSM emerged, in truth, at the tail end of the deal, the vehicle for putting into effect the first loan, and not, as the plaintiff would have this court hold, the fulcrum around which all else turned.

96. It is inconceivable that Mr Yu would have encouraged Mr Deng to go ahead despite the absence of the share certificates. There was no reason for him to do so. It would have been crass folly. That is not in itself the answer to the allegation, for no doubt there will be and have been occasions when negligence by some solicitor or other has reached that proportion, but I have had the advantage of seeing and hearing this young solicitor over a period of some hours. I am satisfied that he has neither made up nor imagined his concern at the time the original share certificate was not produced, and that he has neither imagined nor made up the evidence that he took Mr Deng aside to explain to him that the absence of the original was a serious matter and that the plaintiff company was not secure without it and that he should delay the loan. His concern at the time is echoed by the recollection of his assistant solicitor, a man of evident truth and integrity. The suggestion which emerges from Mr Deng's evidence is that it was he, Mr Deng, who was most concerned and that it was Mr Yu who was not. Not only, according to this account, was Mr Yu relatively unfussed, but Mr Yu went further and told Mr Deng that with the two men Wong and Fok as security he, Mr Deng, had nothing to worry about and that the plaintiff was more than safe. This is to turn reality on its head, and is evidence which I do not accept. Mr Deng is the person who had reason to press ahead despite the risk. And Mr Yu had no such reason. The events with which we are concerned were unfolding apace, with less than an hour to go before the moneys were to be lodged with the bank. Mr Deng no doubt felt himself under considerable pressure to go ahead, and I find that he made that decision despite, and not because of, the advice he had received.

97. There is an argument advanced, which finds itself paraphrased in the amended Reply, that even if Mr Yu sounded the alarm as he suggests, still, that was not enough, for he should have alerted Mr Deng to the possibility that the shares were already pledged elsewhere, and should have pursued inquiries from Deacons. This is to be wise after the event, and to place too little recognition on the speed at which events were taking place, the urgency of the situation, and the attitude of Mr Deng who was keen to conclude the deal. An explanation for the absence of the certificate had been given; Mr Yu had suggested that someone went round to fetch it; and Mr Yu had also made it perfectly clear to the client that he should await the document before the advance was made. It may be that more could have been said, though I very much doubt that it would have made any difference; but in any event the fact that more could have been said does not mean that there has been negligence or a breach of contractual duty and if Mr Yu sounded the warning which I find he did sound, then he did enough to fulfil his duty.

98. The suggestion that Mr Yu led Mr Deng to believe that unless he heard to the contrary, he could assume that the share certificates had been delivered is also a suggestion which I cannot accept. And the way in which that suggestion emerged in the evidence was not altogether untypical of a tendency by Mr Deng to overplay his hand on points which he appreciated were of significance to the case. It showed itself, for example, in a tendency to stress well beyond the realm of probability the emphasis with which the true lender was so often mentioned to Mr Yu, or the fact that it was $20 million that was to be lent, or the fact that Mr Yu said time and time again how safe was the deal. There was no suggestion in his witness statements that Mr Deng was led to believe that he would be notified as and when the share certificates were delivered. In examination-in-chief his evidence was that Mr Yu had said that he would notify the plaintiff in due course about any response to the demand for the receipt of the share certificates; in cross-examination he said that Mr Yu had told him that whether the share certificates were or were not received, he would notify him about the position : so, because there was no notification, he, Mr Deng, accepting that he had made no inquiries whether the certificates had been received, thought before further sums were advanced that the certificates had in fact been received - the logic of which proposition does not bear too much examination. But that account then changed, in that Mr Deng asserted that Mr Yu had told him that if he, Mr Yu, failed to receive the certificates he would so notify Mr Deng. Not only was that a shift of evidential ground, but that would still have been a rather odd way upon which to proceed. It is particularly odd that Mr Deng on his own admission went ahead and advanced a further $11.5 million without contacting Mr Yu to make sure that the share certificates had been deposited and without checking with Mr Wong, with whom he had direct contact, whether they had been delivered. It evidences either a relaxed and over-trusting attitude to the whole affair, an attitude which of necessity changed once matters went sour; either that, or some knowledge on Mr Deng's part that for some reason or other Wong was unlikely to be able at that stage to produce the share certificates.

99. It will be remembered that Mr Yu testified that he had some suspicion, as a result of a conversation in late 1992 or early 1993, that Mr Deng had known of the prior pledge of the shares, and he said that Mr Deng had told him that he had known that the money which was to be lent would be used to repay a loan which was owed by Vaxholm to a third entity. Mr Deng's testimony about the date upon which he first came to know that the shares were already pledged elsewhere is inconsistent; a fact which does not prove, of course, that he had knowledge of the fact before May 1992, but is nonetheless worthy of mention because it affects the reliability of his evidence. In an affirmation in June 1994, Mr Fung, then a director of Vaxholm, affirmed, in other proceedings by the plaintiff, that as early as September 1992, Mr Deng was introduced to him and told him, Mr Fung, that $20 million had been advanced to China East in order to discharge the charge in favour of Scoot City and that Mr Wong had promised to charge the defendant's shares once they had been released from this prior charge, and that at that meeting Mr Deng told Mr Fung that he was aware of Grand Easy's charge over the shares. Now Mr Fung has not given evidence and has, perforce, not been cross-examined, so that the content of that affirmation can carry no weight in these proceedings. But the point is that in his affirmation in reply to Mr Fung's assertions, Mr Deng attested, in July 1994, that the allegations were not only untrue, but that it was only "some time between 14th and 28th January 1994" that he obtained knowledge of the fact that Vaxholm's shares had been pledged to Scoot City, an assertion repeated in his witness statement filed in this action. That evidence conflicts with his testimony in this trial that his discovery was made in November 1992, and it also conflicts with the thrust of an attendance note dated 21st October 1992 written by Mr Paul Yu in which Mr Yu records a conversation with Mr Deng, that day, in which Mr Deng has purportedly informed him that he, Mr Deng was aware that there may have been an earlier transfer of the Vaxholm shares. Mr Deng says that this did not happen, certainly not in October 1992.

100. It is trite that a lack of reliability or even a deliberate untruth does not constitute proof of a positive or contrary averment. What I can say though is that I find it difficult to accept that Mr Deng, in June and July and August 1992 thought that the share certificates had been delivered. I reject the allegation that Mr Yu had led him to believe that they had. I find that Mr Yu told Mr Hui, who was the appointed recipient of information for Mr Deng in Hong Kong, that the certificates had not arrived and that he advised him that no further money should be advanced without them. Mr Deng made no inquiries of Mr Yu, and I find that he was content to lend the further sums without the requisite assurance in respect of the delivery of the share certificate. I should add that the advice which Mr Yu recorded as giving to Mr Hui is an echo of the warning which Mr Yu says he gave Mr Deng at the end of the meeting of 22nd May to the effect that he should wait for the certificate before making further advances, and the evidence of Mr Yu about that warning is evidence which I accept.

101. I find that JSM was engaged or instructed by the plaintiff - and this was the extent of the retainer - to prepare such documents as were required to evidence a loan by Hua Da to China East in the sum of $8.5 million, and to prepare, by way of security for that loan, a share charge or mortgage over or in respect of the Vaxholm shares owned by Hiyanan. Implicit in that retainer was a requirement to give such explanations and advice as were necessarily incidental to that limited task. I find that Mr Deng knew that the documents prepared by JSM in May 1992 covered this amount of loan only and that the documents sought to effect security for the loan of that sum and no more, although I accept that Mr Yu was told and understood that it was intended to lend more money in the near future up to a total of $20 million and that JSM would be asked to prepare such further documentations as was necessary to that end. I am satisfied that Mr Deng was inexperienced in Hong Kong business affairs, though I am not satisfied that he had made that fact known to Mr Yu.

102. I find that Mr Yu prepared or caused to be prepared such documents as were in the circumstances required. I accept that in its broader detail Mr Yu tendered to Mr Deng the advice which he says he tendered at the meeting of 21st May (although I have some doubt about the accuracy of his recollection that he advised Mr Deng at this meeting to check whether there existed a shareholders' agreement). This was far from the first time that Mr Yu had handled a transaction such as the one which he was now being asked to undertake for the plaintiff. There was nothing extraordinary about the documents which had to be prepared, and the advice which he tendered was of a routine kind. There is no reason to suppose, quite apart from the fact that I find him a trustworthy witness, that he would have departed from such routine. I am in particular satisfied that he advised Mr Deng that minority shareholders might be an impediment to the ready disposal or transfer of the shares and that he canvassed with him the desirability of effecting a legal mortgage, but that Mr Deng was not concerned to engage himself in the practical steps which would be required to effect that in time.

103. It is contended by the plaintiff that Mr Yu was negligent in failing to advise Hua Da that it should seek to secure a legal mortgage over the shares and that if, contrary to their contention, the evidence of Mr Yu is correct, namely, that he said that it was preferable for this to be done, that was in itself insufficient advice. It ought to have been made clear, it is said, that without such a transfer effected through a legal mortgage, there was no right in the mortgagee to vote or have control of the board.

104. To ignore the desirability and benefits of a legal mortgage would have been a material omission, and it is clear that a reasonably prudent solicitor ought to tender such advice even where the retainer is merely to prepare mortgage documents. It is advice which is necessarily incidental to that task. The fact that it is an obvious step to take does not, again, raise some evidential presumption in Mr Yu's favour that he took it. But he tells me, and I believe him, that it is his usual practice and that he did so on this occasion. He is frank enough to concede that he did not go into the question of voting rights, or cannot positively assert that he did. It is pointed out by the plaintiff that this evidence that Mr Deng was advised to have the shares transferred to the plaintiff's name does not appear in either of Mr Yu's first two witness statements in this case, and it is said that that is a significant omission. But the fact is that the allegation that there was a failure to advise to secure a legal mortgage was not an allegation that was made until after the start of this trial, an allegation which found its way into the amended Reply. And so there is nothing particularly odd about Mr Yu's suggestion that it was not something upon which he was, before that amendment, required to focus. I accept that explanation.

105. But then it is said that on any view the advice given was insufficient. The client had not been informed of the advantages of being made a shareholder immediately. The argument is that mere reference to desirability of a legal mortgage is not enough. Such a contention has to be examined in context. It was not in prospect an imperative, in my view, that a legal mortgage be obtained especially as it was anticipated at the stage advice was given that share certificates would be deposited and that blank transfers would be tendered, and also as it was obvious to the adviser, and was a fact, that time was very short. An equitable mortgage is an accepted and common form of security and whilst it may have been preferable for Mr Yu to spell out precisely what specific powers lay in a mortgagee upon the execution of a legal mortgage which an equitable mortgagee did not possess, the failure to do so does not in the circumstances of this case constitute negligence or a breach of contractual duty by Mr Yu. He told Mr Deng what the better course was, and the uncertainty which arose in relation to securing a transfer in the future, dependant as that was upon the consent of the minority shareholders. Either stage required their consent and in both instances that might be difficult to obtain, and that was explained.

106. I am in any event convinced that more specific advice would not have made any difference whatsoever, although I appreciate that this, in contract, goes to the question of damages rather than liability. Mr Yu had, I find, suggested a second mortgage but this suggestion was not embraced by the client because, apparently, of the need first to seek and obtain the consent of the first mortgagee. So, too, it is shown to my satisfaction that the question of an assignment of shareholders loans was raised by Mr Yu but again was not taken up by Mr Deng. Furthermore, when, later, a truly serious lacuna was presented in the protection to be afforded to the plaintiff, namely, the non-production of share certificates, even then the advice given by Mr Yu took second place in Mr Deng's mind to his trust in Mr Wong and to his desire that the attractive deal should proceed apace nonetheless. Mr Yu, as I find, suggested to Mr Deng that he sound out the minority shareholders to reach an agreement in principle a course not pursued by Hau Da. This allegation of negligence and of breach, raised for the first time in the course of the hearing itself, cannot, for the reasons I have given, succeed. In the event I do not think any negligence or breach of contractual duty is demonstrated by the failure to press the matter further.

107. Mr Yu, I find, explained to Mr Deng that the value of the shares in respect of which security was to be given would be only 65% of Vaxholm's residual value, that he should satisfy himself that that 65% would have sufficient value after taking into account the first mortgage over the property; that he advised him of the option of taking a second mortgage and of taking an assignment of shareholder's loans; neither of which option was pursued. I find also that all documents prepared were explained to Mr Deng at the time they were explained to Mr Wong and Mr Fok.

108. In so far as inexperience of the client is relevant to this case, I accept that Mr Deng and his company had no experience in doing business in Hong Kong. But inexperience is not necessarily to be equated with naivety, nor with a lack of business acumen, an observation which I judge to be particularly relevant to this case because the decisions to be made by Mr Deng on behalf of his company were infused with business considerations; indeed the defendant would say that business and the prospect of a quick and rich picking was at the forefront of the plaintiff's mind. Mr Deng struck me as a man of maturity; a man of strength and determination; a shrewd man which I do not say in any pejorative sense. I note that the company for which he works, and worked then, is a company of considerable size and invests in a host of different businesses. He is himself an economist and a university graduate holding a highly responsible position in the plaintiff organization. He did not come to Hong Kong on his own, but with colleagues. Whilst of course I accept that he depended to a degree upon advice given by JSM, the width and depth of that dependency is another question altogether. It is self-evident that the value of the piece of land was of central importance for it was from the proceeds of the sale of that land that the money lent was to be repaid. Now Mr Deng says in terms in his evidence that he asked Mr Yu to verify the value of the land, but it is clear that he did not, for had he done so it is inconceivable that Mr Yu would not have caused the valuation to be effected, or that if Mr Yu did not do as he had been asked, Mr Deng would not have pressed the matter. I find that no valuation or confirmation of value was sought or suggested.

109. As for the suggestion that there was a breach of contractual duty and negligence in the failure of Mr Yu to advise or suggest that Vaxholm should be the lender, it is an allegation put forward on the premise that Mr Yu was asked to advise on the appropriate structure for the loan. That is not a valid premise, because he was not asked for such advice. The only advice that fell to be considered in relation to structure of the loan was whether the lender should be Star Glory and Ka Dak Bo, or Star Glory and Hua Da, and in that regard Mr Yu tendered advice. The question of the identity of the borrower was not a matter for discussion, for it was specifically intended by Mr Wong and Mr Deng, for reasons which had been emphasized to Mr Deng by Mr Wong, that China East was to be the borrower and that Vaxholm was not. It is simply not a matter which came within the advice sought from Mr Yu, and there was not implicit in the retainer any requirement to tender such advice.

110. I turn now to the pre-emptive rights given to members of the company by the Articles of Association and the advice given or not given in that regard.

111. In so far as is relevant, articles 40 and 41 of the Articles of Association of Vaxholm read as follows :

"40. (A) ....

(B) Subject to the foregoing provisions of these Articles any shares may at any time be transferred :

(i) by any member being a company to a Member of the same Group as the Transferor Company; and

(ii) to any person with the consent in writing of all other members of the Company which consent may be unconditional or subject to any terms or conditions and in the latter case any share so transferred shall be held subject to such terms and conditions.

.....

41. Except in the case of a transfer of shares expressly authorized by the last preceding Article (a 'Permitted Transfer') the right to transfer shares or to dispose of any shares or any interest in shares in the Company together with all rights attaching thereto shall be subject to the following restrictions and provisions, namely :

(A) Before transferring or disposing of any shares or any interest in any shares the person proposing to transfer or dispose of the same (the 'Proposing Transferor') shall give a notice in writing (a 'Transfer Notice') to the Company that he desires to transfer the same. The Transfer Notice shall constitute the Company his agent for the sale of the shares therein mentioned (together with all rights then attached thereto) at the Prescribed Price (as hereinafter defined) during the Prescribed Period (as hereinafter defined) to any member and shall not be revocable except with the consent of the Directors.

(B) If not more than one month before the date on which the Transfer Notice was given the Proposing Transferor and the Directors shall have agreed a price per share as representing the fair value thereof or as being acceptable to the Proposing Transferor and not more than the fair value then such price shall be the Prescribed Price ..... Otherwise upon the giving of the Transfer Notice the Directors shall request the Auditors to determine and certify the sum per share considered by them to be the fair value thereof as at the said date and the sum per share so determined and certified shall be the Prescribed Price. ....

(C) .....

(D) (i) All shares included in any Transfer Notice shall first by notice in writing be offered by the Company to all members holding shares (other than the member to whose shares the Transfer Notice relates or any member who has given a Transfer Notice in respect of any shares or who by virtue of these Articles is bound to give a Transfer Notice in respect of his shares or any of them) for purchase at the Prescribed Price.

(ii) Every such offer shall be on the terms that in case of competition the Shares shall (in accordance with but subject to the provisions of paragraph (E) below) be sold first to the acceptors holding shares of the same class in proportion (as nearly as may be without involving fractions) to their existing holding of such shares and secondly (if any of the Shares shall remain after such acceptors have been satisfied in full), to the remaining acceptors in proportion (as nearly as may be without involving fractions) to their existing holding of shares PROVIDED that no acceptor shall be obliged to take more than the number of shares applied for by him.

(iii) Every such offer shall limit a time (not being less than twenty one days) within which it must be accepted or in default will lapse. Any shares not so accepted may be offered by the Directors to such persons as they may think fit for purchase at the Prescribed Price.

(E) If the Company shall within the Prescribed Period find members or other such persons as aforesaid (hereinafter called 'Purchasers') to purchase the shares concerned or any of them and give notice in writing thereof to the Proposing Transferor, the Proposing Transferor shall be bound, upon payment of the Prescribed Price, to transfer such shares to the respective Purchasers. .....

(F) If a Proposing Transferor shall fail or refuse to transfer any shares to a Purchaser hereunder any Director may authorise some person to execute and deliver on his behalf the necessary transfer and the Company may receive the purchase money in trust for the Proposing Transferor and cause the purchaser to be registered as the holder of such shares. The receipt of the Company for the purchase money shall be good discharge to the Purchaser (who shall not be bound to see to the application thereof) and after the Purchaser has been registered in purported exercise of the aforesaid powers the validity of the proceedings shall not be questioned by any person.

(G) If the Company shall not within the Prescribed Period find Purchasers willing to purchase all the shares and gives notice in writing thereof to the Proposing Transferor, or if the Company shall within the Prescribed Period give to the Proposing Transferor notice in writing that the Company has no prospect of finding Purchasers of shares, or any of them, the Proposing Transferor at any time thereafter up to the expiration of two months after the Prescribed Period shall be at liberty (subject only to the provisions of the foregoing provisions of these Articles) to transfer those shares for which the Company has not within the Prescribed Period given notice that it has found (or has given notice that it has no prospect of finding) Purchasers to any person on a bona fide sale at any price not being less than the Prescribed Price.....

Provided that :

(i) if the Transfer notice shall state that the Proposing Transferor is not willing to transfer part only of the shares concerned he shall not be entitled hereunder to transfer any of such shares unless in aggregate the whole of such shares are so transferred; and

(ii) any Director may require to be satisfied that such shares are being transferred in pursuance of a bona fide sale for the consideration stated in the transfer without any deduction, rebate or allowance whatsoever to the Purchaser and if not so satisfied the Directors shall refuse to register the instrument of transfer."

112. The evidence of Mr Yu, which I accept, is that he said to Mr Deng that even if the shares of Vaxholm had a net worth when the need arose to transfer or sell the shares, the plaintiff would have to discuss and negotiate with the minority shareholder since Vaxholm was a private company and even if the minority shareholder was not interested in itself purchasing the shares, there might be difficulty in selling to a third party who might find it difficult in co-operating with the minority shareholder.

113. In the amendment to the Reply the plaintiff alleged that the defendant was in breach of contract and in breach of its duty of professional care in failing to advise about the right of pre-emption, and in particular that the existence of that right would in effect mean a severe restriction on the right to foreclose the shares and at the same time would also adversely affect the value of the shares.

114. I accept Mr Thomas' submission that the point is in the event of some academic, rather than practical, interest for it is not foreclosure in which the mortgagee is interested in such circumstances but rather redemption and the value of the shares. The right of pre-emption does not materially affect the value of the shares. Moreover where, as in this case, it is the client who has specifically proposed the share mortgage, indeed has approached the solicitor expressly for the purpose that the solicitor shall draw the relevant documentation, and where the solicitor has explained that a legal mortgage is preferable, and that in the case of a private company transfer of shares requires the consent of the minority shareholders and that that is a matter for negotiation, I do not see that it is then incumbent on the solicitor to explain in terms that the Articles of Association place a restriction in their effect on the right of foreclosure. The failure to do so does not in this case, in my view, constitute negligence nor a breach of the contractual duty which arose. I am fortified in this conclusion by the evidence of Mr Chao which was to the same effect, and I do not think that it makes any difference that this particular client was from the Mainland rather than from a common law jurisdiction. It is not suggested that the concept of a mortgage is a concept foreign to Mainland businesses, and it is not as if this client went to a solicitor expressing a desire to lend funds to China East or to Vaxholm, asking how they should go about it, and what forms of security they might seek. But once again it is not proved in the slightest degree that had Mr Yu proffered further advice, the plaintiff would have acted any differently.

115. There are a number of ancillary allegations with which I must deal. There is an allegation in the amended Reply that the defendant should have advised that it was desirable for the plaintiff to obtain authorisation and power of attorney to sign documents and to attend meetings and to exercise all rights as shareholder of Vaxholm. Mr Yu's answer is that he was of the view that the mortgage which was drawn gave adequate powers in this regard. I agree. Given the following terms of the share mortgage, it was unnecessary to render the specific advice for which the plaintiff now contends :

"6. (a) ....

(b) ....

(c) The Shareholder by way of security hereby irrevocably appoints Hua Da to be its attorney and in its name and on its behalf and as its act and deed or otherwise to execute, seal, deliver or otherwise perfect or do any such transfer alteration or addition and other documents as aforesaid and all such deeds, assurances, agreements, instruments, acts and things which may be required for the full exercise of all or any of the powers hereby conferred or which may be deemed proper on, or in connection with, any transfer, sale, disposition or getting in by Hua Da of any of the Shares.

(d) The Shareholder hereby ratifies and confirms and agrees to ratify and confirm any instrument, act or thing which Hua Da may execute or do pursuant to Clause 6(b) or 6(c) hereof.

......

10. Unless an Event of Default has occurred, all votes exercisable in respect of the Shares shall be exercised by or in accordance with the instructions of the Shareholder so long as such exercise does not result in breach of any obligations of the Shareholder under the Agreement and/or this Share Mortgage. After the occurrence of an Event of Default, Hua Da may at any time exercise at its absolute discretion (in the name of the Shareholder or otherwise and without any further consent or authority on the part of the Shareholder) any voting rights attaching to the Shares or any of them as if Hua Da were the sole beneficial owner thereof."

116. I accept that Mr Yu advised Mr Deng that he should obtain information about Vaxholm's financial position and audited up to date accounts. I hardly think that it was then necessary for him to emphasise or specifically suggest that Wong and Fok were in a convenient position to render those accounts and that information.

117. I further accept the testimony of Mr Yu that he told Mr Deng that if there arose a need to sell or transfer the shares the plaintiff would have to negotiate with the minority shareholders and that when discussing the question of transferring the shares to the plaintiff's name he advised him to sound out the minority shareholders to see whether there might be reached some understanding in principle. The matter about which I am less sure is whether Mr Yu is accurate in his recollection that he advised the plaintiff in May, as opposed to October, to ascertain whether there was a shareholders agreement. That said, the plaintiff has not satisfied me that such advice was not given in May.

118. Then it is said that the defendant ought to have told Mr Deng that the granting of the share mortgage could not prevent Vaxholm or Hiyanan or China East from incurring new liabilities. Mr Yu had told Mr Deng that the value of the shares would depend on the residual value of the company when they came to sell the shares. I would have thought it would have been obvious to Mr Deng - with or without that comment by Mr Yu - that none of the companies was inhibited from incurring future contractual liabilities. There was in my view no obligation upon Mr Yu to say more. Nor do I think that it was incumbent on the solicitor, especially given the very limited nature of the retainer, to advise the client to seek an undertaking from Vaxholm or any of the other companies on the future application of their funds.

Conclusion

119. Before the plaintiff had first crossed the threshold of JSM's offices, Mr Deng and his colleagues had had about a week or more to digest and discuss the proposed business proposition. It is evident that they had already made their key decisions before they went to JSM and were in general satisfied about such representations as had been made to them. They were not people without business experience, and I think that the capital which they have sought to make of their lack of Hong Kong experience, whilst not irrelevant, has been exaggerated in its true significance. Mr Deng is a mature official, who was representing a large organization, and who, in the China East transaction, was dealing with men whom, for better or worse, he knew and trusted and with one of whom his organization had previously conducted business. He had come to Hong Kong, obtained information about the site, visited the borrower's solicitors and discussed facts with them, and in the final and short straight towards an important deadline went to see JSM for documents to be drawn. The services which Mr Yu was called upon to perform were performed within a very tight time frame. Mr Vincent Lau speaks of the rushed atmosphere which pervaded the events of 22nd May 1992, an impression that the parties were in a hurry, and he recalls Mr Yu urging his staff on several occasions to speed the preparation of documents.

120. That is the flavour of the matter, and that is the atmosphere in which, and the background against which, Mr Yu gave advice and caused documents to be drawn. It is a case in which Mr Deng took risks at the time of the loan, which transaction he hoped would turn out well for the plaintiff company, and I think that with the passage of time and much time has passed he has convinced himself that the fault for what happened lay elsewhere. But I am satisfied that it did not lie with JSM.

121. The case against JSM has not been proved, and the plaintiff's claim is accordingly dismissed. There will be judgment for the defendant, and a costs order nisi that the plaintiff shall pay the defendant's costs of this action, to be taxed if not agreed.