MING HSIEH v. XU ZHE AND OTHERS

CACV 235/2017

[2019] HKCA 101

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 235 OF 2017

(ON APPEAL FROM HCMP 3072/2014)

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REASONS FOR JUDGMENT

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Hon Lam VP (giving the Reasons for Judgment of the Court):

1.  On 8 September 2017, Lok J heard the parties in an application by the 1^st and 2^nd Defendants to enforce the undertaking as to damages by the Plaintiff. The undertaking was given by the Plaintiff in his application for a Mareva injunction against the Defendants. That injunction had been discharged by this Court (Lam VP and Barma JA) on 3 June 2016.

2.  At the hearing, the judge directed there should be formal inquiry for one head of claim of the 1^st and 2^nd Defendants (which was referred to as the Default Payment Claim) but heard submissions from counsel for summary determination of the other head of claim (which was referred to as the Depreciation in Value Claim).

3.  Lok J gave his decision on 22 September 2017. He determined the Depreciation in Value Claim in favour of the 1^st and 2^nd Defendants and awarded damages in the sum of $3,508,600 in favour of the 2^nd Defendant under that head.  Subsequent to the hearing, the 1^st and 2^nd Defendants informed the judge before the handing down of the decision that they would not proceed with the Default Payment Claim. 

4.  The Plaintiff appealed against the decision on the Depreciation in Value Claim.  We heard the appeal on 22 November 2018.  After hearing counsel, we dismissed the appeal with costs.  We now give our reasons for the dismissal of the appeal.

5.  The history of the proceedings leading to the application for enforcement of undertaking was set out by Lok J at [2] to [10] of the decision of 22 September 2017 and we shall not repeat the same in this judgment.

6.  The assets which were frozen by the injunction included some listed shares [“the Shares”] held in the 2^nd Defendant’s bank accounts.  The nature of the two heads of damages sought by the 1^st and 2^nd Defendants were summarized by counsel before the judge as follows (see [11] of the judgment):

“ Mr Dawes SC, counsel for the 1^st and 2^nd Defendants, confirms that his clients are only seeking the following damages:

(i) Had the Defendants’ assets not been frozen, the 2^nd Defendant would have sold the Shares and used the proceeds to fund the 1^st Defendant’s investment in a mine in Tajikistan. As a result of the Injunction Order, the 2^nd Defendant was unable to sell the Shares and the 1^st Defendant was unable to participate in the said investment, which in turn led to the 1^st Defendant becoming liable to make a default payment of US$2,000,000 (“the Default Payment Claim”).

(ii) The Shares depreciated in value between the date of the Injunction Order (21 November 2014) and the date of the Consent Order (23 January 2015) in the sum of HK$3,508,600 (“the Depreciation in Value Claim”).”

7.  As the primary submission of Ms Chan SC and Ms Cheung for the Plaintiff was that the judge’s decision on the Depreciation in Value Claim was inconsistent with his direction for formal inquiry in respect of the Default Payment Claim, it is necessary for us to allude to the reasoning of the judge on the latter aspect the case.

8.  The judge discussed the Default Payment Claim at [19] to [24] of the decision of 22 September 2017.  For the purpose of this appeal, what he said at [20] to [23] have to be read carefully:

“ 20.  I agree with Mr Lung that the court should not just accept the 1^st and 2^nd Defendants’ allegations on face value, and the Plaintiff should be allowed to investigate the genuineness of the claim.

21.  There are still a lot of unanswered questions to the claim:

(i)  Was there alternative source of funding for the alleged investment other than the frozen assets?

(ii)  Were there other partners who would be able to offer financial assistance at that moment?

(iii)  Did the 1^st Defendant conduct any negotiation with the counterparty to delay payment or to arrange for alternative funding?  For example, the counterparty might agree to accept late payment because of changing market condition.

22.  Further, although legal liability to make the default payment may, in certain circumstances, justify an award of damages for such payment, there are certain unusual features in the present case which warrant further investigation.   Despite the call from the Chinese Embassy of Tajikistan, the counterparty does not seem to have taken any steps to enforce the Investment Agreement or to claim the default payment.   This is odd in view of: (i) the 1^st Defendant’s evidence that the counterparty had cash flow issues; and (ii) almost 3 years have passed since the alleged “debt obligation” arose by the end of 2014.

23.  I agree that damages resulting from the discharge of a Mareva injunction should be liberally assessed and the court should approach the issue in a broad common-sense way.   However, if there are so many unanswered questions and unusual features about the claim, it is only fair that the paying party should be given the opportunity to investigate the claim including obtaining discovery and cross-examining the relevant parties.”

9.  The above reasoning should be considered against the background that as far as the Tajikistan mine investment was concerned, the Defendants had produced an investment agreement of 17 March 2014 evidencing the same.  Before the judge, the challenge by the Plaintiff (at that stage, the Plaintiff was not represented by Ms Chan and Ms Cheung) against the Default Payment Claim concentrated on the absence of credible evidence to show that the injunction caused the breach of that agreement and lack of evidence on making the default payment or enforcement of such payment obligation[1].

10.  On the Depreciation in Value Claim, the judge accepted the submissions of Mr Dawes SC and Mr Wong that it could be processed summarily without directing any formal inquiry.  He rejected the submissions of the then counsel for the Plaintiff that the claim should not be allowed as the Shares remained unsold despite the fluctuations in the market (including the rise in value of one of the stocks in May to June 2015 to levels higher than the price as at the date of the grant of the injunction).  He also rejected the submission that the Defendants should have sought consent earlier[2] from the Plaintiff to enable the Shares to be sold. 

11.  The judge had these to say in rejecting those submissions at [28] to [32]:

“ 28. Mr Lung also submits that, even when the Injunction Order was in place, if the 2^nd Defendant had wished to sell the Shares, she could have sought consent from the Plaintiff which would have been forthcoming in a matter of days.  She would then not have suffered any loss at all.

29.  I cannot accept these arguments.   By holding onto the Shares, the 2^nd Defendant has to take the risks associated with the fluctuation of the Shares after the Consent Order.   If the price of the Shares were to drop further after the Consent Order, she should not be allowed to make any claim for such loss because it was caused by her decision not to sell the Shares.   However, it is an undisputed fact that the 2^nd Defendant was not allowed to dispose of the Shares in the Relevant Period.   Given that the 2^nd Defendant intended to sell the Shares to raise fund for the Investment Agreement, this would be the loss naturally flowing from the wrongful granting of the Injunction Order.

30.  In fact, whether the 2^nd Defendant has demonstrated her intention to sell the Shares in the Relevant Period is quite immaterial.  The 2^nd Defendant had been restrained to deal with the Shares in that period of time, and so there should appropriate damages awarded to her for the loss of opportunities relating to the disposal of the Shares.  In my judgment, the depreciation in value of the Shares in the Relevant Period should be regarded as the proper loss reflecting the loss of such opportunities.

31.  Further, the Plaintiff cannot possibly argue that there was delay on the part of the 2^nd Defendant in seeking consent from the Plaintiff to sell the Shares.  The court should allow reasonable time to the Defendants to seek proper legal advice, in particular they had faced different proceedings both in the United States and Hong Kong at the same time.  Given such circumstances, it would be unrealistic for the Plaintiff to suggest that the 2^nd Defendant should have made the request earlier.

32. In respect of the Depreciation in Value Claim, I agree that the dicta of Lord Clarke in MGA Entertainment Inc v Toys & Trends (Hong Kong) Ltd are applicable here.  It is clear that the 2^nd Defendant has lost the liberty to deal with the Shares in the Relevant Period, and she should be properly compensated for such loss.  In this regard, the damages should be liberally assessed and the court should adopt a common sense approach in dealing with the matter.  Hence, I agree to deal with the Depreciation in Value Claim summarily and award damages in the sum of HK$3,508,600 in favour of the 2^nd Defendant for such claim.  The damages would be paid out from the Fortification Money.”

12.  Ms Chan submitted that in enforcing an undertaking as to damages, a defendant has to satisfy the court both as to the fact of damage and its amount.  Counsel referred to the well-known principle as stated by Lord Diplock in F Hoffmann-La Roches & Co AG v Secretary of State for Trade and Industry [1975] AC 295 at 361:

“ … The assessment is made upon the same basis as that upon which damages for breach of contract would be assessed if the undertaking had been a contract between the plaintiff and the defendant that the plaintiff would not prevent the defendant from doing that which he was restrained from doing by the terms of the injunction.”

13.  She also took us to the judgment of Lord Clarke NPJ in MGA Entertainment Inc v Toys & Trends (Hong Kong) Ltd (2014) 17 HKCFAR 27 at [16] to [19].  After alluding to the liberal approach in assessment discussed in Les Laboratories Servier v Apotex Inc [2009] FSR 3, Lord Clarke said at [18] and [19]:

“ 18. The liberal approach … does not of course mean that, in relation to causation, the court is free to decide what it likes without reference to the evidence or to the burden of proof. As I see it, the court should approach the issue in a broad common sense way … In this regard I agree with the approach of Arnold J … that the claimant does not need to show that the injunction was the exclusive cause of the loss. It must be an effective cause of the loss.

19. … the claimant must prove that the loss was caused by the injunction and not by the existence of the litigation.  Thus the loss must be such that it would not have been sustained but for the injunction but the injunction need not be the sole cause of loss …”

14.  Ms Chan submitted that the judge had wrongly taken the drop in market values of the Shares as the damages suffered by the Defendants without regard to the question of causation.  The crux of this part of the submissions was set out at para 13 of the written submissions of 25 October 2018:

“ The Injunction Order prevented D2 from disposing of the Shares in the Relevant Period. The ‘injury’ suffered was that she was unable to dispose of the Shares at a particular price, which is distinct from, and irrelevant to, the depreciation in value of the Shares. Any drop in the share price is merely inherent fluctuation in value, which would have been ‘suffered’ regardless, and is not sustained because of the Injunction Order.”

15.  In other words, it is not enough for the Defendants to show that there had been a drop in the market values of the Shares during the relevant period.  If the Defendants did not show that there had been an intention to sell the shares during that period, the drop in value is not a damage caused by the injunction.

16.  We have no quarrel with this proposition.  In our judgment, in addition to the fall in market values, the Defendants have to show that but for the injunction the 2^nd Defendant would have sold the Shares during the period.

17.  The judge proceeded on the same basis.  Thus, at [29], he said:

“ Given that the 2^nd Defendant intended to sell the Shares to raise fund for the Investment Agreement, this would be the loss naturally flowing from the wrongful granting of the Injunction Order.” (our emphasis)

18.  The first sentence at [30] of the judge’s decision may be open to three different interpretations.  First, it can be read as meaning that the Defendants need not show that the 2^nd Defendant had the intention to sell the Shares during the relevant period.  Second, it can mean that the Defendants need not demonstrate to the Plaintiff during the relevant period that the 2^nd Defendant had that intention.  Third, it can mean that the judge had accepted the 2^nd Defendant’s intention to sell the Shares for the Tajikistan investment.

19.  As explained at [15] to [16] above, we cannot agree with the first meaning and insofar as the judge had so held, that would be wrong.  But the second meaning could be the answer given by the judge to the contention of Plaintiff set out at [28] of the decision.  

20.  We disagree with Ms Chan in her submissions that in addition to the intention of the 2^nd Defendant to sell the Shares, it must also be established that she had communicated her intention to do so to the Plaintiff and the Plaintiff refused to consent despite such intimation.  The imposition of such additional requirement would not be consistent with the common sense approach in discerning if the injunction was an effective cause of the damage.  If a plaintiff obtained an injunction over listed stocks, it must be within his contemplation that the injunction would prevent the defendant from selling the shares even if the latter wishes to do so.  

21.  As for the third meaning, such intention had been evidenced, in the 3^rd affirmation of the 1^st Defendant of 21 December 2014 where he alluded to the use of the proceeds of the Shares to finance the Tajikistan mine investment.

22.  Even proceeding on the basis that the judge erred in the first sentence at [30], it does not affect his clear finding at [29] (based on the only evidence before the court) that the 2^nd Defendant had intended to sell the Shares.  We note that at the court below, counsel for the Plaintiff did not specifically challenge such intention on the part of the 2^nd Defendant. 

23.  Ms Chan submitted that such finding by the judge was inconsistent with his earlier refusal to accept the evidence of the Defendants on its face value in respect of the Default Payment Claim.  However, as we have seen above, the judge only found unanswered questions at [21] and unusual features warranting further investigation at [22] in respect of the causation between the injunction and the liability for default payment under the investment agreement.  The judge did not question (and neither did counsel for the Plaintiff before the judge question) the Tajikistan mine investment and the intention of the Defendants to invest.  Read in context, the general statements at [20] and [23] must be read in light of these two paragraphs spelling out explicitly the concerns of the judge.

24.  We reject Ms Chan’s submission that there were inconsistent findings by the judge.

25.  In light of the above analysis, it is academic to engage in the debate if the loss suffered by the Defendants should be characterized as a loss of opportunities.  The submissions of Ms Chan under Ground 3 cannot assist the Plaintiff.

26.  Ms Chan attempted to revive the arguments based on alleged delay in seeking a consent order and the failure of the 2^nd Defendant to sell the Shares after the consent order (which were rejected by the judge at [29] and [31]) by framing them in submissions based on failure to mitigate loss under Ground 4. 

27.  We agree with Mr Dawes that there is nothing in this Ground.  Given that the original purpose of selling the Shares was to finance the mining investment and by the time of the Consent Order such purpose had dissipated, it was not surprising that the 2^nd Defendant had to make a fresh decision to keep the Shares or sell them.  In that connection, as the Judge rightly observed at [29], the 2^nd Defendant bore the risk in respect of market fluctuations in relation to the Shares after the Consent Order.  The claim in respect of the fall in price prior to the Consent Order was based on the finding that the 2^nd Defendant would have sold the Shares before the Consent Order but for the injunction.

28.  As regards the time taken by the 2^nd Defendant to seek the consent order, we agree with the observations of McCombe LJ in Abbey Forwarding Ltd v Hone (No 3) [2015] Ch 309[3] at [65] on the need to have the circumstances facing a party at the receiving end of an injunction in mind in assessing damages caused by an injunction.  Ms Chan failed to persuade us that the Judge’s finding at [31] as to the timing of the Defendants’ request for variation was plainly wrong.

29.  Ground 5 is only another way of framing that part of Ground 4 based on the timing of the request for variation.  It adds nothing to the Plaintiff’s appeal.

30.  For these reasons, the appeal was dismissed with costs to the Defendants, with a certificate for 2 counsel.