YU MAN FUNG ALICE v. CHIAU SING CHI STEPHEN AND ANOTHER

HCA 1584/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1584 OF 2012

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D E C I S I O N

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Introduction

1. There are two applications, one made by the plaintiff and the other by the 1^st defendant (“D1”).

2. D1’s amended application is:

(a)  to strike out the amended writ and statement of claim (on various grounds);

(b)  for rulings pursuant to RHC Ord 14A;

(c)  to dismiss this action against D1;

(d)  to extend the time for filing and serving his defence.

(but the Ord 14A application is no longer pursued by D1)

3. The plaintiff’s application is for leave to re-amend her amended statement of claim (“the amended S/C”).

4. By way of case management, I decided to hear and determine the two applications together.  The reason for so deciding will appear below (especially para 17(b), 26, 29, 32 and 35).

Background

5. There was an earlier application of the 2^nd defendant (“D2”) to similarly strike out the amended writ and the amended S/C.  The issues involved in that application are similar to (but not exactly the same as) those involved in this application.  D2’s said application was dismissed on 7 February 2013 (“the 7 Feb decision”) and the 7 Feb decision is now the subject-matter of a pending appeal to the court of appeal.

6. The background has been summarized in the 7 Feb decision, which I will gratefully adopt:

“2. [The plaintiff] was [D1’s] girlfriend between 1997 and 2010. It is [the plaintiff’s] case (as against [D1]) that early in their relationship they entered into an agreement (which for the purpose of these proceedings is called the ‘Commission Agreement’) whereby [the plaintiff] would provide investment advice to [D1]. For this service she would receive a monthly remuneration plus, according to the Statement of Claim, 10% of the after-tax profits resulting from any successful investment. It is her case that under this agreement she was paid various sums over the years totalling about $19 million.

3. By far the most successful investment has been the Skyhigh Project. It is this project which is at the centre of this litigation and both summonses.

4. In a nutshell the Skyhigh Project was a 50-50 joint venture between Ryoden Development Ltd and [D1] ‘through [D2]’ (Star Royale) (Statement of Claim paragraph 7). It concerned the purchase (for $320 million) and development of a site at Pollock’s Path on the Peak. Four houses were built on the site. It is [the plaintiff’s] case that after the sale of two of the four houses she was paid nearly $15 million pursuant to the Commission Agreement. This payment is therefore the lion’s share of the $19 million she has received since the agreement commenced.

5. It was decided to account for 100% of the purchase and development costs after the sale of the first two houses before calculating [the plaintiff’s] 10% of the after-tax profits earned by [D2’s] 50% of the joint venture. Thus, after deducting from 50% of the proceeds of sale, all purchase costs, all development costs and all tax liabilities, 10% of the remaining profit equalled $15 million. That meant that the remaining two houses (numbers 10 and 12 Pollock’s Path) when sold would be all profit to the joint venture. Number 10, the property of the other 50% joint venture partner, Royden, was sold in 2011 for $800 million.” (emphasis supplied)

The above “Commission Agreement” will be called “the said agreement” below.

7. Based essentially on such a background, the amended S/C avers that:

(1)  under the said agreement, the plaintiff was to “provide personal investment advisory service” to D1 (para 2, amended S/C);

(2)  in return for the said service, D1 would pay the plaintiff a performance-based sum “in terms of profit sharing at ten per cent (10%) after tax profits on the successful investment” (para 3, amended S/C). The said sum will be called “service fee” below;

(3)  there were various earlier successful real property and stock investments for which the plaintiff was paid her service fee from May 2007 to January 2010 (para 5, amended S/C);

(4)  instead of disposing of it, D1 began to occupy House No 12, the Skyhigh (“the subject property”) since about the end of 2011.

8. The plaintiff’s claim for the outstanding service fee is based on:

“… [D1’s] occupation [of the subject property, which] constituted an act of proprietary ownership equivalent to [a] sale of [the subject property] or realization of its monetary worth … ” (para 10, amended S/C).

This will be called the “service fee claim” below.

9. The plaintiff then pleads that, because of the latest sale of the Skyhigh (on an unpleaded date after October 2009) was for a price of $800 million, her service fee for the subject property would be at least $80 million (para 9, amended S/C).

10. The concept of “act of proprietary ownership” is not immediately clear.  It is probable the pleader is referring to D1’s act of occupying the subject property as an incident of his exercising an owner’s “usual rights of ownership” (as the last-mentioned phrase was explained in Cheuk Shu Yin v Yip So Wan and Another, FACV 9/2011; 11/2011 (13 November 2012), para 30 (in the context of a “Home Ownership Scheme” unit)).

11. Whether the exercise of such a right can constitute an act of sale, or an act of realizing the subject property’s monetary worth (that is, its market value at the time of occupation) will be discussed in para 24 to 27 below.

12. Further to the service fee claim, the amended S/C claims:

“[D1’s] said occupation of [the subject property] and crystallization of the obligation of pay the Plaintiff [her service fee] created a constructive trust in him of the Plaintiff’s said interest in the proceeds of sale …” (para 11 thereof).

13. Similar to “act of proprietary ownership”, the concept of “the Plaintiff’s said interest in the proceeds of sale” is also not immediately clear.  This will also be discussed in para 28 to 30 below.

14. Based on the alleged “interest in the proceeds of sale”, the plaintiff contends that she holds an equitable interest in the subject property to the extent of the service fee.  This will be called the “trust claim” below.

Relevant legal principles

15. These are undisputed.

16. In relation to an application to striking out pleadings:

(a)  such an application is only for plain and obvious cases;

(b)  phrases such as “obviously unsustainable”, “unarguably bad” and “it is impossible, not just improbable, for the case to succeed” are apt descriptions of such cases.

17. In relation to an application for leave to amend pleadings:

(1)  subject to questions of lateness in the stage of legal proceeding, time-limitation and so on, generally all such amendments ought to be made for the purpose of determining the real question in controversy between the parties, or of correcting any defect or error in any proceedings: Hong Kong Civil Procedure 2013, Vol 1, para 20/8/6;

(2)  however, immaterial and useless amendments will not be allowed: Hong Kong Civil Procedure, para 20/8/24.

The service fee claim

18. As set out above, the service fee claim depends entirely on the validity of her case that D1’s occupation of the subject property constitutes:

(i)  a sale; or

(ii)  a realization of the market value,

of the subject property (at the end of 2011).  They will respectively be called “deemed sale” and “deemed profit realization” below.

19. Having so pleaded her claim for service fee, strangely in her written submissions, the plaintiff contends:

(a)  the event which is said to render the plaintiff’s service fee to accrue is D1’s rejection of her request for payment (para 13, plaintiff’s written submissions);

(b)  D1 allegedly breached the said agreement (i) when he refused her request for payment on 28 July 2011 and/or (ii) when he failed to respond to her solicitors’ letter of demand dated 9 December 2011 and/or (iii) by his letter dated 30 March 2012 (para 14 to 15 and 19, amended S/C).

20. Damages for breach of contract become payable upon the occurrence of the breach: Chitty on Contracts (2012) 31^st Ed, Vol 1, para 24-049, citing Photo Production Ltd v Securicor Transport Ltd [1980] AC 827, 849.  They should also be assessed as of that time: Chitty, Vol 1, para 26-014.

21. In relation to a contractual obligation to pay, the breach occurs when the paying party fails to do so in accordance with the contract terms.

22. Consequently, according to the amended S/C, D1’s payment obligation should arise on the deemed sale or deemed profit realization (that is, the end of 2011) (para 10 thereof).  Such being the case, it is hard to understand why her written submissions contend instead that the service fee became accrued in July 2011 and/or December 2011 and/or March 2012 (D1’s refusal of the plaintiff’s request to pay).

23. Reference has also been made to D1’s payment of $10 million on 1 March 2012 (para 17, amended S/C) but this is more probably pleaded as D1’s acknowledgement of his obligation to pay the service fee than an act which constitutes a cause of action.

24. As a matter of ordinary language and daily experience, a “sale” involves a transfer of ownership (or at least some proprietary interest) in property to a purchaser (or purchasers) in exchange for something else (usually money).  Examples of statutory definitions of “sale” can be seen at s 3(1), Sale of Goods Ordinance (Cap 26); s 2, Stamp Duty Ordinance (Cap 117) (“conveyance on sale”); s 2, Conveyancing and Property Ordinance (Cap 219).  A “realization of market value” would involve a similar transaction.  Both are in the nature of a bipartite (or even multipartite) transaction.

25. Merely because an owner exercises his right of occupation of his own property comes nowhere near such kind of transactions. It is not an act which involves another party (or other parties) either.

26. By reason of the above matters, the service fee claim is either obviously unsustainable, or at the very least incomprehensible (and thus “embarrassing”).

27. This is even more so if one examines the nature of the said agreement.  As pleaded, it is a contract in which the plaintiff was to render her personal service, namely, to “provide personal investment advisory service” (para 2, amended S/C, and para 7(1) above).  This will be discussed further under the heading “Other Matters” (especially para 38 to 45) below.

The trust claim

28. As stated above, the said agreement is in the nature of a contract for personal service, namely, the provision of “personal investment advisory service”.  The consideration which should move from D1 to the plaintiff in return for such service (insofar as it is relevant to striking out application) was the service fee.  D1’s obligation to pay the service fee is therefore in the nature of a personal contractual liability to do so.

29. Consequently, the averment:

“the Plaintiff’s said interest in the proceeds of sale” (para 11, amended S/C, and para 12 and 13 above),

has no valid legal basis.

30. Further, it has not been pleaded that the said agreement involved the transfer of property or proprietary interest inter partes (whether from the plaintiff to D1 or vice versa).  In other words, it has not been pleaded that the said agreement intended:

(1)  the plaintiff was to transfer any of her properties to D1;

(2)  D1 was to transfer any of his properties to the plaintiff;

in relation to D1’s investments (acquired as advised by the plaintiff).

31. Such being the case, there is no known legal principle in support of the rather bold averment in the amended S/C to the effect a constructive trust can somehow be created in relation to the service fee for which D1 is said to be liable.

32. Thus, the trust claim is also obviously unsustainable.

The leave to re-amend application

33. It is the plaintiff’s case the draft re-amended statement of claim (“draft S/C”) has not changed her case in substance, it is said to:

“… simply refine and define the Plaintiff’s case with greater particularity, avoiding ambiguity” (para 7, plaintiff’s reply submissions to D2’s on the leave to re-amend application).

34. Because of that stance, and because of the extensive discussion of the plaintiff’s service fee claim and trust claim in relation to the striking out application (and the conclusion that they are obviously unsustainable), I do not propose to repeat the discussion here.

35. An obviously unsustainable case will remain so even if it is “refined” and better “defined … with greater particularity” and less ambiguity.  Such being the case, and because immaterial or useless amendments should not be allowed (para 17(2) above), the leave to re-amend application should be dismissed.

36. I should note, for completeness, the reference in the draft S/C to D1’s mortgage of the subject property to obtain funds cannot mend the fundamental defects in the plaintiff’s presently pleaded case.

Other matters

37. It is not the court’s duty to salvage a litigant’s case (or to frame one for him).  Having said so, however, a note should be made concerning the gist of the exchange between the court and counsel for the plaintiff and D1.  The said exchange arose out of:

(a)  the facts already disclosed in the various versions of the plaintiff’s pleadings (including the draft S/C);

(b)  the plaintiff’s complaint in her written submissions that if her service fee claim were to depend on D1’s sale of the subject property in future (if at all), this will mean the plaintiff can be kept out of her service fee indefinitely (see, for example, para 8, written submissions);

(c)  the Civil Justice Reform rules empowering the court to be more “proactive” (for example, some of the underlying objectives are the court should ensure that a case is dealt with expeditiously, ensure fairness and promote procedural economy).

The crucial matter on which the said exchange was based was that the said agreement (as pleaded) was in the nature of a contract to provide personal service (“personal investment advisory service”).

38. It may be easier to begin by examining the case of an investment fund manager (be it a mutual fund or hedge fund).  The money of the investor (the principal) is given to the fund manager (who can be regarded as the investor’s agent or trustee) for investment purpose (with a view to obtaining a monetary gain).  It is usual for the fund manager to be given discretionary powers for such purpose, namely:

(1)  when, and what, to acquire (in other words, to buy) (if at all) item(s) as investment tool(s) (such as stocks, bonds, futures contracts, real properties and so on);

(2)  when to dispose of (or sell) the acquired item(s) by way of realization of the investment (hopefully at a profit).

It should be apparent from the above a successful investment will involve the fund manager making a “correct” decision not only to buy but also to sell the investment item(s) (that is, the seemingly simple, and yet elusive, notion of “buy low, sell high”).

39. The word “correct” should be understood in the context of the investment markets, which almost invariably would involve price volatilities of various degrees (with the result that “correctness” should usually be judged at the time of the decision, and not with the benefit of hindsight).  For more details on the duties of financial practitioners, see, for example, Jackson & Powell on Professional Liability (2012) 7^th Ed, para 15-022, 15-026, 15-034 to 15-036 and 15-046 to 15-050.

40. As stated in para 38 above, the investor’s money has to be transferred to the fund manager for investment purpose; and the investment tool(s) are acquired by him.  And here lies the main difference between an investment fund manager and an investment advisor.  The latter’s service is merely to advise; no funds (or properties) will be placed in the advisor’s hands.

41. But that apart, there should be little difference between them in relation to the essential ingredients of a successful investment (that is, a “correct” decision to buy and a “correct” decision to sell the investment item(s)).

42. The above seems to apply a fortiori to the said agreement, a term of which is service fee calculated at “… [10%] after tax profits on the successful investment”.  The word “profits” strongly suggests a sale of the investment tool(s).  Further, the earlier successful investments (para 5, amended S/C, and para 7(3) above) were apparently also conducted on such basis.

43. But because of the above difference, an investment advisor can only advise his principal, but cannot dictate that the advice be abide by.  And because the investor owns (and usually also controls) the investment tool(s), he can choose not to follow the advice to realize the investment (such as, by holding on).  Another possibility is that the investor may, after acquisition, decide to put the investment tools(s) to non-investment use(s) (using a real property as a home for himself and/or others, giving stocks away to his relation(s) as free gift(s) and the like).

44. When the investment adviser’s fee is tied to investment performance, such changes can bring about dispute concerning his fee entitlement (as has happened in this action).

45. The investment advisor’s entitlement to his fee (for his advisory service) will ultimately have to depend on the terms of the contract between him and his principal.  But it appears at least arguable that, in the absence of contrary contractual intention, his contractual obligations would have been discharged in full by rendering the advice to buy and sell (outlined above); and hence arguably should be entitled to such fees accordingly (irrespective of the principal’s decision (such as those set out in para 43 above)).  I leave aside in this discussion the matters mentioned in para 39 above.

46. Finally, to avoid doubt, it should be noted that the parties’ closing submissions also mentioned various other points.  These have not been expressly set out or dealt with in the above headings and sub-headings.  This is so only because of the need to balance between the length of the judgment and its comprehension.  It does not mean those other points are thought to be irrelevant (or have been overlooked).  To avoid doubt, those other points have also been considered.

Conclusion

47. The amended S/C against D1 should be struck out.  As D1 sensibly accepted at the hearing, it is not presently an appropriate case to order a dismissal of this action.

48. In view of the matters set out above, I consider the proper course to be to allow the plaintiff an opportunity to put forth a proper claim.  The order which is made in relation to the striking out application is:

(a)  the amended S/C against D1 is struck out;

(b)  unless the plaintiff files and serves a re-amended statement of claim within 42 days from today, this action against D1 is dismissed.

The time for D1 to file and serve a defence is extended to 42 days thereafter (to avoid doubt, this is to replace the time extension order made on 19 March 2013).

49. The application for leave to re-amend the amended S/C is dismissed.

Costs order nisi

50. There is no apparent reason to depart from the usual rule that costs should follow the event.  There will accordingly be a costs order nisi pursuant to Ord 42 r 5B(6) that the costs of the striking out application be paid to D1 and the leave to re-amend application be paid to both defendants.

51. I consider summary assessment of costs to be appropriate.  The above costs shall thus be so assessed.  For this purpose (and subject to any application to vary the order nisi made in accordance with Ord 42 r 5B(6), which if made will automatically stay the following directions):

(1)  the receiving parties be at liberty to lodge with court and serve a statement of costs within 14 days from today;

(2)  the paying party be at liberty to lodge with court and serve a statement of objections within 14 days thereafter.