MACRO CHARM LTD v. PHOENIX LUMBER NICARAGUA S.A. AND OTHERS

HCA 484/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 484 OF 2012

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D E C I S I O N

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Introduction

1.  This is an application by summons dated 27 November 2012 taken out by the 3rd defendant (“D3”) for the following relief:

(1) An order discharging the Order of Master Ng dated 16 May 2012 granting leave to serve the writ of summons herein on D3 out of the jurisdiction;

(2) Further or other orders including a declaration that in the circumstances of the case the Court has no jurisdiction over D3 in respect of the subject matter of the claim; alternatively

(3) An order setting aside the writ on grounds of irregularity;

(4) Such other or further orders as the Court thinks fit; and

(5) Costs of the proceeding including the costs of this application to D3 on an indemnity basis.

Background

2.  The plaintiff’s claims in this action relate to an Asset Purchase and Sale Agreement dated 19 August 2010 (“the Agreement”) that it had entered into with the 1st and 2nd defendants (“D1” and “D2” respectively). 

3.  The statement of claim pleads that the plaintiff is and was at all material times an investment company incorporated in the BVI with its principal place of business in Hong Kong (“HK”).  It is related to The Maxdo Group Limited (“Maxdo”) which has offices in HK and across the PRC.  D1 and D2 are private companies incorporated in Nicaragua with no known place of business in HK and were at all times represented by D3, who was a director and shareholder of D2 or had been represented to the plaintiff to be so. 

4.  Under the Agreement, the plaintiff contracted to purchase from D1 and D2 the Sale Assets, namely hurricane affected forests in Nicaragua of an area of about 150,000 hectares in the R.A.A.N. region of Nicaragua and the rights to own, cut, extract, exploit, transport and export timber from those forests.

5.  The plaintiff’s claim against D3 (and also similarly against D1 and D2) is for fraudulent misrepresentations made by him (and them) that induced the plaintiff to enter into the Agreement.  D3’s false misrepresentations were made to the plaintiff prior to, during the negotiations of and after, the plaintiff entered into the Agreement.  This included representations made at a meeting which took place at the offices of Maxdo in HK on 8 March 2010 as to the size of the forest land which D1 and D2 had the legal title and extraction rights to and which they could sell.  The representations have, after the Agreement had been entered into and the transaction completed, turned out to be false.

Service on the defendants

6.  The writ was issued on 23 March 2012.  Service on D1 and D2 was made pursuant to a provision of the Agreement, ie clause 23, which reads:

“Each of the Sellers [ie, D1 and D2] hereby appoints the following persons to accept service of process on its behalf in Hong Kong:

Address: Niranjan Arasaratnam

Attention: 10/F Jardine House, 1 Connaught Place, Central, HONG KONG

Telephone: +852 2840 1202

Facsimile: +852 2840 0686

Each of the Sellers further agrees to maintain duly appointed agent in Hong Kong to accept service of process out of Hong Kong and to keep the other party informed of the name and address of such agent.  Service on such process agent (or its substitute appointed pursuant to the procedures described above) shall be deemed to be service on the other party.  The provisions herein shall apply to the service of court process on the process agent of the relevant party.”

7.  Service of the writ on D1 and D2 was effected on 30 March 2012 by leaving a sealed copy of the writ together with a cover letter to Mr Niranjan Arasaratnam at the reception of Messrs Allens Arthur Robinson, at Suite 1001-1020, Jardine House, 1 Connaught Place, Central, HK, an international law firm of which Mr Arasaratnam was a solicitor, and also on 31 March 2012 by sending a sealed copy of the writ together with a cover letter to Mr Arasaratnam at the same address by registered post. 

8.  On 23 May 2012, interlocutory judgment with damages to be assessed was entered against D1 and D2 in default of their acknowledging service of the writ.

9.  In the meantime, upon the plaintiff’s ex parte application, Master Ng made an order dated 16 May 2012 granting leave to the plaintiff to issue a concurrent writ and to serve a copy of the writ on D3 out of the jurisdiction.  By a further order made by Master Hui on 24 August 2012, leave was granted to the plaintiff to serve the order for substituted service and a copy of the concurrent writ out of the jurisdiction on D3 by way of substituted service.  This led to the present summons before me.

Grounds of application

10.  As expressly stated in the affirmation filed on behalf of the plaintiff in support of the application for service out on D3, the plaintiff relied on sub-paragraphs (c), (d), (f) and (p) of Order 11 rule 1(1) to found jurisdiction.  The application was made:-

(a)     under Order 11 rule 1(1)(c), on the basis that a claim is brought against a person (in this case, against D1 and D2 for breach of contract and for fraudulent misrepresentation) duly served within the jurisdiction and a person out of the jurisdiction (ie, D3) is a necessary or proper party thereto.  The plaintiff’s allegations in the statement of claim set out under Background above demonstrates that D3 is a necessary and proper party to these proceedings and that there is a real issue to be tried between the plaintiff and D3;

(b)     under Order 11 rule 1(1)(d), on the basis that a claim is brought to recover damages or obtain other relief in respect of a breach of a contract (against D1 and D2) which by its terms, or by implication, is governed by HK law and/or contains a term to the effect that the Court of First Instance shall have jurisdiction to hear and determine any action in respect of the contract.  By reason of clause 20 of the Agreement, the Agreement is governed by and construed in accordance with the laws of HK and is subject to the non-exclusive jurisdiction of any valid court sitting in HK for any proceedings arising out of or relating to the Agreement;

(c)     under Order 11 rule 1(1)(f), on the basis that the claim against D3 is founded on a tort and the damage was sustained, or resulted from an act committed, within the jurisdiction.  At least some, if not all, of the tortious acts (fraudulent misrepresentations) alleged against D3 were committed in HK at the meeting on 8 March 2010, and the damage to the plaintiff was sustained in HK given that the plaintiff has its principal place of business in HK; and/or

(d)     under Order 11 rule 1(1)(p), on the basis that the claim is brought for money had and received or for an account or other relief against D3 as constructive trustee, where the alleged liability arises out of acts committed within the jurisdiction.  As stated above, at least some, if not all, of the tortious acts alleged against D3 were committed in HK at the meeting on 8 March 2010. 

Grounds (1)(c), (d) and (p)

11.  Mr Paul Carolan, counsel for D3, points out that ground (1)(d) is quite irrelevant to service out on D3 because D3 was not a party to the Agreement.  Mr Jonathan Wong, counsel for the plaintiff, does not dispute this.  I accept the point and nothing further need be said in this respect.

12.  Regarding ground (1)(c), since service had been effected on D1 and D2 and interlocutory default judgment had been entered against them, what is left to be done up to the present moment is for damages to be assessed against those two defendants.  Mr Carolan’s contention is that the relevance of D3 being a proper and necessary party to the claim against D1 and D2 has significantly decreased in its importance, so that the plaintiff can hardly rely upon ground (1)(c) any further for service out.  I agree.

13.  On ground (1)(p), the plaintiff’s claim against D3 is as a constructive trustee to the extent that D3 received any of the moneys paid by the plaintiff as induced by the misrepresentations.  This is a claim based on knowing receipt of the proceeds of the deceit perpetrated by D1 and/or D2, or that perpetrated by D3 himself.   The elements involved of this claim for the plaintiff to prove are the same or partially the same as those for the claim on misrepresentation, save that the plaintiff must prove that D3 received the proceeds or part of them.  Mr Carolan argues that there can be no basis for the claim of constructive trust, because there was no trust and no fiduciary relationship alleged against D3.  I reject this argument because insofar as there was knowing receipt by D3 of any money paid by the plaintiff in reliance of any of the alleged fraudulent misrepresentations, there could be a constructive trust entitling the plaintiff to trace the money against D3: see Wesdeutsche Landesbank v Islington LBC [1996] AC 669, at 715H-716D, recently considered by me in JS Microelectronics Ltd v Achhada Dilip G & Anor, HCA 1202/2012 (23 November 2012, unreported), paras 21-23 and 28-32.  Nevertheless, since the plea is hypothetical, “to the extent” of D3’s receipt of any of the plaintiff’s money, without a definite assertion that D3 had received any such money, it is incomplete and should not be considered as a proper ground for reliance under Order 11, rule 1(1)(p).

14.  What remains to be considered therefore, is ground (1)(f) that is based on the claim of fraudulent misrepresentation against D3.

Sufficiency of support for service out

15.  At this juncture, it is pertinent to point out that there is no dispute between the parties that the plaintiff bears the burden of showing that there is a good arguable case that its claim falls within one of the sub-paragraphs of RHC Order 11, rule 1(1), for present purposes now limited to the claim for fraudulent misrepresentation against D3 under ground (1)(f), that there is a serious issue to be tried on the merits, and that the case is a proper one for service out of the jurisdiction.

16.  Mr Wong submits, which I accept, that where the parties have advanced rival contentions of fact at the interlocutory stage, the court has to consider all the evidence before it to determine whether the plaintiff has shown a good arguable case, and that where the plaintiff has raised a serious issue to be tried, the defendant who seeks to set aside the service has to assume the most onerous burden of demonstrating that the plaintiff’s claim is liable to be struck out: Wo Fung Paper Making Factory Ltd v Sappi Kraft (Pty) Ltd [1988] 2 HKLR 346, at 357, per Hunter JA and Hong Kong Civil Procedure 2013, Vol 1, para 11/4/9.

Ground (1)(f) - tort committed within HK

17.  Mr Carolan concedes that ground (1)(f) could satisfy the good arguable case test on the basis that the alleged tort of deceit was committed by D3 in part through statements made at the meeting in HK on 8 March 2010 because the conduct constituting the tort relied on need only have been partly carried on in HK.  It follows that even assuming (and it is unclear from the pleading) all representations relied on, other than those at the 8 March 2010 meeting, were made outside HK, then ground (1)(f) may still be invoked to found jurisdiction for granting leave.  It is, however, argued that it appears that subsequent representations (‘pre-completion’) by D3 in writing (by emails) to persons in HK would, on good authority (see Bullen & Leake 17th Ed, Vol 2, para 58-10) not be taken to have been made in HK but in the place from which the messages were sent, (Australia).  In my view, however, this argument is quite inconsequential.  Insofar as part of the misrepresentations were made in HK, and there is no challenge that D3 was in the meeting on 8 March 2010 in HK in which alleged false representations were made, then ground (1)(f) can be relied on; whether other misrepresentations were made in HK should only be properly considered in the context of the forum conveniens aspect, discussed below.

18.  Mr Carolan makes a number of submissions to attack the claim on fraudulent misrepresentation against D3 as not being strong enough to meet the ‘good arguable case’ criteria.  He argues that apart from the alleged misrepresentation of D1 and D2’s right to sell a certain area of land and the right to extract timber from the forests therein, some of the misrepresentations pleaded are expressions of opinion as to the lumber content and future profitability of the land to be acquired or the prospect of acquiring further land at a later stage.    However, he cannot deny that D3 appeared to be an expert on these and related matters and in the circumstances of this case, I am satisfied that there is a good arguable case that the expressions about lumber or timber content of the forests inside the land or prospective land to be acquired and about expected profits can constitute actionable misrepresentations.    

19.  Next, Mr Carolan’s attack is based on the rules of pleading.  He complains about the paucity in the pleading which shows that further and better particulars would be ordered, which demonstrates more importantly a general lack of merit in the claim. Such lack of a properly pleaded claim in deceit results in the claim failing to satisfy the good arguable case criteria in Order 11.  He challenges that there is a ‘good arguable case’ because of the limited scope of the representations alleged to have been made by D3 on 8 March 2010 and/or the lack of any sufficient plea of fraudulent conduct on his part.  He draws my attention to Bullen &Leake ibid, paras 58-11 and 58-12, the relevant parts of which read:

“The particulars of claim must show the nature and extent of each alleged misrepresentation … and contain particulars showing when, where (if relevant) by whom and to whom it was made, and how it was made, whether orally or in writing, and if in writing, identifying the relevant document …” (para 58-11)

“There is no rule that requires that particulars of knowledge must be pleaded where a fraudulent intention is alleged, so long as the actual knowledge is unequivocally pleaded … Nevertheless it is better practice to plead details of the grounds on which it is alleged that the defendant had knowledge. …” (para 58-12)

20.  Mr Wong submits that the nature and extent of each of the alleged misrepresentations against D3 has been pleaded in the statement of claim, with sufficient particulars of when, where, by whom and to whom it was made, including on one occasion at the meeting in HK on 8 March 2010 by, inter alios, D3, to the plaintiff.  In reliance of the misrepresentations, the plaintiff had entered into the Agreement and made US$1 million deposit payment to D1 and D2, and eventually completed the transaction and paid a further US$9 million.  After discovering that the representations were false, the plaintiff rescinded the Agreement.  It is also alleged that the false representations were made by D3 and others knowingly, without belief in their truth or recklessly, careless whether they be true or false.  While Mr Wong accepts that no particulars of D3’s knowledge of falsehood have been pleaded, he contends that that would at most be against better practice but not a breach of a compulsory rule.  This may be a matter subject to an application, but it cannot be a basis for saying that the plaintiff does not have a good arguable case or a serious issue to be tried on the merits.   

21.  Support for the strength of the plaintiff’s case can be found, Mr Wong submits, in the fact that D3 has so far not denied that he had made the representations.  D3 has merely seen fit to barely assert that “any representation made by me were, to the best of my knowledge and belief, true at the time they were made” without stating the basis of his knowledge and belief. 

22.  On all the materials now before me, I am satisfied that there is a sufficient plea of fraudulent misrepresentation against D3, that the plaintiff has shown a good arguable case that this claim falls within ground 1(f) and that there is a serious issue to be tried on the merits.

Forum non conveniens

23.  Mr Carolan contends that in any event HK is not the natural and convenient forum (the forum non conveniens, ‘FNC’, point) which is raised as a separate basis for setting aside leave in its own right.  If the court is not wholly satisfied that the plaintiff has shown that HK is the appropriate forum then leave ought to be set aside.  This is also a basis, apart from the failure to fall within a ground under Order 11, which can deprive the court of jurisdiction.  The FNC burden is on the plaintiff: Order 11 rule 4(2) of the RHC and Hong Kong Civil Procedure, ibid, paras 11/1/8, 11/1/10 and 11/4/5.

24.  The issues that require determination by the court for the claim on fraudulent misrepresentation to be established are:

(a) What, if any, representations were made by D3 to the plaintiff?

(b) Whether the representations were false, and false in which respect.

(c) Whether D3 knew that they were or any of them was false.

(d) Whether D3 intended that they be relied upon by the plaintiff.

(e) Whether the plaintiff did rely and act on them or any of them.

(f) Whether the plaintiff has suffered any damage or loss as a result of such reliance.

(g) The extent of such damage or loss.

See also Bullen & Leake, ibid, para 58-01.

25.  While Mr Carolan concedes that the location of some of the plaintiff’s witnesses in proving the above issues are in HK, he disputes that the plaintiff is a HK resident (albeit not registered) company.  Despite the fact that the Agreement is stipulated to be governed by HK law and the parties thereto have agreed to submit to non-exclusive jurisdiction of the HK courts, Mr Carolan draws my attention to the Deed (more particularly referred to below) that is expressly governed by Nicaragua law.  He submits that the Deed supersedes or impacts the parties’ rights and obligations under the Agreement.  What is not in dispute is that D3 is resident in Australia (and an Australian national) with no HK connections or assets.  Moreover, on the issue of whether the representations made by D3 were false, that will involve Nicaragua law necessitating expert evidence if the trial takes place in HK.   There will also be factual matters about land titles, the subject matter of the transaction, in Nicaragua.  Thus, Nicaragua is a more convenient forum for the claim against D3 to be resolved.    

26.  Further, it is argued the plaintiff had obtained its own due diligence advice on these land and lumbering matters and appeared to have satisfied itself to complete the transaction in late December 2010.  As the due diligence report indicates that the representations made by D3 were true, then it must be compelling evidence that the 3^rd Defendant could not have been fraudulent when making the representations in HK even assuming they were made entirely as alleged. 

27.  In my view, by looking at how the issues on the misrepresentation claim as set out in paragraph 24 above can be proved or otherwise, one can reach a fair conclusion whether HK is a convenient forum.  On issue (a), there can be little dispute that most of the plaintiff’s directors and officers must have received the misrepresentations in HK since they were resident in HK, or at least they were in HK when most if not all of the misrepresentations of D3 were received.   Little foreign element is involved.  There is also evidence that when trouble arose, D3 as well as others who were involved came to HK at the request of the plaintiff in an attempt to resolve problems.

28.  On issue (b), from what is pleaded in the statement of claim, it seems to me that the falsehood alleged is the representation on the size of the land that would be sold to the plaintiff for the consideration of US$10 million, which would be linked to the representation as to the volume of timber on the land as well as the representation as to profitability, and might also be linked to the question of title to the land of the transferor.  Regarding the size of and title to the land and the volume of timber available, witnesses in these respects on both fact and law may be resident in Nicaragua, and it would therefore be more convenient for those witnesses if the trial takes place there.   If, however, the trial takes place in HK, regarding Nicaragua law, resort can be made to expert evidence.

29.  On the other issues, (c), (d), (e), (f) and (g), the convenience clearly favours HK since the witnesses would mainly come from the plaintiff and the applicable law is undeniably HK law.  Moreover, it is to be noted that the Agreement is in both English and Chinese, a feature that is closely connected with HK.  The evidence of the parties on all these issues will undoubtedly be in either of these two languages with which the HK courts are most familiar.  The advantage in this respect will be better appreciated when one considers the language problem alluded to in relation to the contents of the due diligence report referred to below.  One must also not forget that the law relied on by the plaintiff is the common law on false representations.  If the matter is tried in Nicaragua as intimated by Mr Carolan, one wonders how this question of law can be more conveniently dealt with by the courts there instead of in HK.

30.  As far as D3 is concerned, I accept that normally he will need to give evidence to defend himself; but he does not expressly say that any other place than HK would be more convenient for him in giving evidence.  One obvious forum that may convenience him as a witness is Australia where he lives, but this would be a weaker demand than HK when compared with the number of witnesses that may be called for the plaintiff who are physically in HK.  Nor, as accepted by Mr Carolan, does D3 take any point of any juridical advantage that is available to him in any place other than HK.

31.  In the circumstances, I consider that HK is clearly a forum conveniens regarding the plaintiff’s claim against D3.

Misstatement of the plaintiff’s address

32.  Mr Carolan asserts that the plaintiff may have no HK address as it is not registered under part XI of the Companies Ordinance, Cap 32.  He submits that the allegation made in paragraph 1 of the statement of claim that the plaintiff has a principal place of business (“PPB”) in HK appears to be false.  If the plaintiff is a non-resident foreign company, there would be a breach of Order 6 rule 5(1)(a) of the RHC, the consequences of which include that the action may be stayed as well as security for costs will be required.  Mr Carolan’s assertion of the address being false is based on his submission that there would have been better evidence of the address, if true, than the mere assertion made in the affirmation of Kwan Wing Cheung Edmund (“Kwan”).   Kwan is one the plaintiff’s directors and his affirmation is that filed on 8 January 2013 which affirms that the plaintiff’s PPB is in HK and its management and control is in HK.  Moreover, the statement of claim right in its first paragraph describes the plaintiff as a BVI company with its PPB in HK.  Kwan’s affirmation describes Maxdo’s businesses as including natural resources and forestry, and the plaintiff is one of the special purpose vehicles used by Maxdo.  The plaintiff is indirectly wholly owned by Splendid Flourish Limited which was also incorporated in the BVI and has offices in Hong Kong at 4^th Floor, Prince’s Building, 10 Chater Road, HK (the address of the plaintiff as endorsed on the writ).  The plaintiff uses that office as its principal office and its management meets and makes business decisions in HK.  Mr Carolan goes to the extent of suggesting that the plaintiff claims that address as its own for the purpose of supporting the service of the writ out on D3.  I find this suggestion quite unlikely, because the plaintiff’s solicitors were exchanging correspondence with Messrs Baker & McKenzie prior to taking out these proceedings and were apparently surprised when the latter denied having instructions to accept service, which then gave rise to the necessity of serving on the nominated service agent for D1 and D2 and of serving on D3 out of the jurisdiction.

33.  Even if the plaintiff’s address is incorrect, which I do not believe to be the case, the remedy cannot properly be a stay of the proceedings.  In the circumstances of this case, the defendants would at most be entitled to seek security for costs against the plaintiff as a foreign plaintiff. 

Material non-disclosure

34.  Apart from the plaintiff’s false address point, Mr Carolan refers to two other matters that ground material non-disclosure in support of D3’s application to discharge the order of service out on him obtained by the plaintiff ex parte. 

35.  There was a Deed that had been adopted by the plaintiff and D1 and D2 in place of the Agreement with the effect that these two defendants did not have to assign the land to the plaintiff and instead the 10 local indigenous communities would assign the land to the plaintiff direct.  The Deed was expressly stated to be governed by Nicaragua law and subject to an arbitration clause.  The complaint is that the Deed is not referred to at all in the plaintiff’s supporting affirmations or statement of claim.  It is argued that the Deed superseded the Agreement and thus its non-disclosure is material.

36.  Whatever the effect of the Deed on the Agreement and on the contractual obligations and liabilities between the plaintiff and D1 and D2, Mr Carolan readily accepts that the Deed is not material to the plaintiff’s claim for fraudulent misrepresentation against D3.  It should also be noticed that there is no provision in the Agreement or in the Deed that excludes reliance by the plaintiff on the representations that had been made to it or that had been incorporated into either document.  Moreover, if the alleged misrepresentations could have been superseded by the Deed, the same argument would apply to dislodge the reliance of the plaintiff on them by reason of their having been superseded by the Agreement that was entered into earlier on between the plaintiff and D1 with D2 subsequent to the alleged misrepresentations having been made.  The plaintiff had right from the start in the statement of claim referred to the Agreement and the omission of mentioning the Deed in the statement of claim does not appear to me to have any material effect on the strength of its claim based on misrepresentation.  For these reasons, I do not consider the omission of the Deed in the statement of claim or in the affirmations in support of the application for service out on D3 as a material non-disclosure. 

37.  The second alleged non-disclosure relates to the due diligence advice that the plaintiff had received from its Nicaragua lawyers before the completion of the transaction.  Mr Carolan submits that it is telling that no attempt is made by Kwan to explain or justify this non-disclosure which must be material because the report satisfied the plaintiff that it could proceed with completion, which suggests that it was no longer relying (if it ever had) on the representations alleged to have been made by the defendants.

38.  Mr Carolan submits further that while the plaintiff also relies on four emails as containing misrepresentations from D3, no mention is made that these emails actually formed part of a much larger series of correspondence regarding the due diligence exercise which included the report (in various drafts) itself which are now disclosed in full in D3’s affirmation.  Rather than constituting further representations inducing completion this was simply part of the exchange of information involved in the due diligence exercise whereby the sellers were assisting the buyer in ascertaining whether the conditions precedent were satisfied and it was the buyer, with the benefit of its own Nicaraguan lawyers/advisers that satisfied itself in this regard! 

39.  Mr Carolan stresses that since the due diligence review had been undertaken at the request of the plaintiff and the due diligence report had been obtained by it prior to its completion of the transaction, these due diligence revelations must be material and the omission of any mention of them amounts to material non-disclosure, especially when the plaintiff’s reliance on the alleged misrepresentations should be seen as having been displaced or superseded by its reliance on the due diligence report.   This appears to me to be a stronger argument than the non-disclosure of the Deed by the plaintiff because the Agreement and the Deed would consist of a repetition of the alleged misrepresentations or of further representations or misrepresentations being made, whereas the due diligence review and report could more forcibly be argued as an independent measure to check the veracity or reliability of the alleged representations, although it could not, without more, be logically argued as having the force of dislodging any reliance that the plaintiff would have on the alleged misrepresentations.

40.  Mr Carolan draws my attention to Section II item D of the due diligence report dated 18 December 2010 and submits that it confirmed the representation on the size of the forest land to be sold and assigned to the plaintiff.  Moreover, he argues that this confirmation by the due diligence report demonstrates the absence of any basis for saying that D3 knew that the representation was false. The heading of Section II is “Precedent” and item D under it reads:

“D.- based on Public Deed N°42 of ‘Exclusivity Contract of Utility of Lumber (red and white wood)’ authorized at 10:40am on June 9^th of 2010 under the notary services of Felipe de Jesus Tellez Wilson, Ms. Flordinita Alvicio, Mr. Hipolito Hammons Francisco, and Mr. Bayardo Antonio Vallecillo Hermandez appear in the function as authorities of the 10 indigenous communities, and on behalf of the other party, Mr. Jonathan David Shwabsky in representation of the corporation Phoenix Lumber Nicaragua S.A. by which they concede the amount of 150,000 hectares of Forest for the exploitation of wood, within the following terms: use of all kinds of existant species of trees; Phoenix Lumber may choose the location of those 150,000 hectares in only one site or in different places, it will be required a plan of forest use, the corporation will have the right to choose before any other activity of forest use, the responsibility of the reforestation is of the community, the corporation will pay the community the amount of US$12 or its equivalent in cordobas for cubic meter of white wood and the amount of US$25 for each cubic meter of mahogany and real cedar, the community commits to defend the corporations in the event that a third party puts at risk the execution of this contract, within other. …”

41.  I am unable to gather the meaning as Mr Carolan suggests out of the passage cited above. 

42.  On the other hand, Mr Wong draws my attention to the layout of this due diligence report.  It consists of three sections, with the following headings: “I. Legal Documents Revised”, “II. Precedent” and “III. Legal Considerations and Conclusions”.  He submits that Section II Precedent only deals with the recital of matters and documents cited under it, and item D should not be considered as the legal opinion or conclusions given by the maker of the report, which are contained under Section III.  Under Section III, there is a passage that reads:

“So under this legal normative the legal representatives of these communities are elected through a communal and territorial assembly which at the same time elects the communal and territorial authorities, these last being highest hierarchy … Its with these people, in particular, the territorial authorities with which presently Phoenix Lumber has subscribed their Use of Forest Contract, which together are the guarantees for Forest Use for the Indicated areas (17,008.18 and 14,003 hectares) protect their rights.”

43.  Mr Wong submits that D1 and/or D2 had only the stated size of forest land (ie, 17,008.18 and 14,003 hectares, totalling 31,011 hectares) available to be transferred to the plaintiff.  The representations made by the defendants, including D3, were that 150,000 hectares of such land would be sold and transferred to the plaintiff and the falsehood of the representations was that only 31,011 hectares instead of the 150,000 hectares as represented were available.

44.  I am unable to have a clear and entire understanding of the true purport or meaning of the two above apparently rival passages in the due diligence report cited by counsel.  Nevertheless, I prefer the reasoning of Mr Wong to Mr Carolan’s in that what is significant or more significant in the due diligence report should be the matters under Section III “Legal Considerations and Conclusions” than those under Section II “Precedent”.  For the time being, I am not satisfied that Section II item D has the effect of confirming the land size representation that 150,000 hectares of land were available to be sold and transferred to the plaintiff by or at the behest of D1 and D2.  Thus, I am unable to accept that the due diligence review is material to the merits of the plaintiff’s claim for fraudulent misrepresentation on the size of the land to be sold to the plaintiff, or to conclude that it has the effect of relegating the plaintiff’s claim to the point that it fails to meet the requisite merit threshold for service out. 

45.  The arguments on material non-disclosure proffered by Mr Carolan are weakened by the fact that the alleged misrepresentations are alleged to have been made fraudulently.  It would be absurd to consider that despite false representations having been deliberately made to deceive, their deceiving effect would be displaced by a document subsequently signed by the parties (ie, the Deed) containing the same representations, or that the representer would be exonerated from any liability for the misrepresentations by reason of the inclusion of the representations in the document.  By the same token, unless the due diligence review and report had exposed the falsehood in the misrepresentations and the plaintiff still went ahead regardless, the argument that the reliance of the plaintiff on a due diligence report would displace the plaintiff’s reliance on the misrepresentations would hardly be able to succeed.  The due diligence report may contain false information, provided fraudulently or negligently or innocently, or the plaintiff might have misunderstood its content, but D3 has not been able to satisfy me the undisclosed information is material as having the alleged consequence or effect of dislodging the plaintiff’s reliance on D3’s alleged misrepresentations on alternatively exonerating D3 from liability for them.  D3 has identified the non-disclosure, but it has not shown to my satisfaction how it is material.  In the circumstances, I am not disposed to rule that there is material non-disclosure merely because the non-disclosure of the fact that due diligence review had been conducted and such a report had been made.

46.  If I am wrong, I consider it just in the circumstances of this case to exercise my discretion not to discharge the leave to serve out: see Hong Kong Civil Procedure, ibid, para 11/4/4.

Conclusion

47.  For the above reasons, I reject all of the substantive arguments raised in support of D3’s application.  I dismiss D3’s summons accordingly.  I also make an order nisi that the plaintiff have the costs of the summons against D3.