LAU CHUN MING v. DELOITTE TOUCHE TOHMATSU (a firm)

HCCL 24/2013

[2019] HKCFI 2722

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMMERCIAL ACTION NO 24 OF 2013

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BETWEEN

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J U D G M E N T

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I. Introduction

1.  This is the trial of the Action on liability.

2.  The Plaintiff was the major creditor of Ma Koon Sik (“Ma”) for an unpaid judgment of over HK$30 million (“Judgment”) awarded in his favour on 21 March 2001 in HCCL 111 of 1996.  After the Judgment, the Plaintiff obtained various securities including charging orders and a writ of Fieri Facias against the properties of Ma ie shares, land in Hong Kong and machineries. 

3.  On 6 August 2002, the Plaintiff presented a bankruptcy petition (“Petition”) against Ma in HCB 16163 of 2002 and, on 30 October 2002, a Bankruptcy Order was granted against him.  The unsecured creditors of Ma included the Plaintiff, Ma’s wife Madam Chan King Har (“Chan”), Broadfield International Limited (“Broadfield”), a company related to Chan or Ma, and the Hong Kong Housing Authority, with Lau being the most substantial independent creditor[1].

4.  In this Action, the Plaintiff claims against the Defendant for breach of an implied term (“Implied Term”) of a contract between the two (“Contract”) said to be evidenced by or contained in a Chinese letter issued by the Defendant (“Letter”).  The Letter was signed by the Defendant’s senior manager 楊磊明 (“Yeung”) and dated his signature 16 October 2002 whereby, on the Plaintiff’s case, in consideration of the charges and payments stipulated in the Letter including the payment of a non-refundable deposit of HK$100,000 (“Deposit”), the Defendant agreed that it would arrange its partners Lai Kar Yan Derek (“Lai”) and Darach E Haughey (“Haughey”) (i) to seek appointment as the Joint and Several Trustees of the estate of Ma and (ii) to assist the Plaintiff to handle or otherwise deal with the properties of Ma already charged by the Plaintiff (“Charged Properties” or “Secured Assets”). 

5.  The Plaintiff subsequently paid the Deposit by cheque and delivered the same, together with a duplicate of the Letter signed by him personally and dated 21 November 2002, to the Defendant by hand in the morning of 22 November 2002, as evidenced by the date and time chop on the envelope to the Defendant.

6.  Meanwhile, on 21 November 2002, at the 1^st General Meeting of Creditors held at the office of the Official Receiver (“OR”), where inter alia both the Plaintiff and Lai were present, Lai and Haughey were appointed Joint and Several Trustees of the estate of Ma (“1^st Trustees”) obviously with the support of the Plaintiff as the most substantial creditor of Ma.  A creditor’s committee comprising the Plaintiff and Broadfield was also formed at that meeting.

7.  The 1^st Trustees acted as such from 21 November 2002 to 29 June 2009 when they were removed and replaced by Yat Ming Cheung and Rainier Hok Chung Lam (“2^nd Trustees”). On 11 December 2009, Lai and Haughey applied to the Court for an order for release (“Release”) under section 94 of the Bankruptcy Ordinance, Cap 6 (“BO”).  Their application was not met with any opposition.  On 28 January 2010, Master Hui granted the Release.

8.  Shortly afterwards, on 5 February 2010, the 2^nd Trustees were replaced by Yiu Cho Yan and Tsang Hin Shun Thomas (“3^rd Trustees”).  The 3^rd Trustees obtained the relevant books and records from the 2^nd Trustees (who themselves obtained the same previously from the 1^st Trustees), made some inquiries and brought 3 actions with a view to recovering the assets of Ma (“Recovery Actions”) as follows:

a. On 2 August 2011, HCMP 1455 of 2011 concerning Ma’s payment/remittance from his current account with Wing Lung Bank, within 2 years of the presentation of the Petition, of HK$3,226,172.59 together with a further sum which made up a total of CAD$700,000 (“CAD Payment”) to Patrick Lai in Canada on 15 March 2001, as well as a total sum of HK$8,845,000 by 3 cheques in March 2001 (“HK Payment”) to Chan;

b. On 2 August 2012, HCMP 1606 of 2012 concerning Ma’s undisclosed property in the city of Arcadia, Los Angeles, US (“Arcadia House”) which had been registered in the name of Ma and his wife, Chan as joint tenants since 1989 and was sold for USD$428,000 on 30 April 2002, less than 4 months before the presentation of the Petition; and

c. On 16 August 2012, HCMP 1729 of 2012 concerning Ma’s undisclosed property in Arcadia Avenue, San Gabriel, US (“San Gabriel Condo”) which was registered in the name of Ma and a Madam Nancy Wang, husband and wife, as joint tenants.

9.  The Recovery Actions were met with challenges on the ground that they were time-barred.  By a Deed entered into on 7 March 2013, the 3^rd Trustees, the Plaintiff, Ma and other creditors of Ma reached a settlement (“Settlement Deed”) whereby inter alia the Recovery Actions were discontinued and/or withdrawn upon Chan making a payment of HK$5 million.  The Plaintiff received slightly over HK$500,000 from the settlement, after deducting fees, expenses and legal costs.

10.  On 26 July 2013, the Plaintiff issued the Writ of Summons in this Action against the Defendant.  Apart from the contractual claim, the Plaintiff had also advanced a tortious claim against the Defendant.  However, the Court of Appeal struck out that tortious claim as disclosing no reasonable cause of action on 12 October 2015 in CACV 22/2015.  The Court of Appeal’s decision was based upon the effect of the Release. The Court of Appeal held that under s 94 BO, the Release relieved the 1^st Trustees of all liability and consequently also had the effect of releasing the Defendant from all liability.

II. The Plaintiff’s case

11.  As stated earlier, the Plaintiff’s claim is now based solely on the Defendant’s breach of the Implied Term of the Contract as evidenced by or contained in the Letter.

12.  According to the Letter which was addressed to “Mr. Lau Chun Ming, Sam Woo Marine Works Limited[2]”:

1.1 It was expressly stipulated in the 1^st paragraph that “Our firm follows up our talk with you days ago”.

1.2 It was expressly stipulated in the 2^nd paragraph that “Our firm is given to know that you wish to submit to the Court a petition for the bankruptcy against Mr. Ma.  If the Court grants a bankruptcy order against Mr. Ma, you would consider appointing two of our firm’s partners / persons-in-charge (namely Lai Kar Yan and Darach E. Haughey) as the joint and several trustees of the relevant bankruptcy case and in addition, to assist you to deal with the assets under Mr. Ma’s name as charged by you.”

1.3 The Letter then set out two different bases on which the Defendant would charge its professional fees ie asset realization basis and time basis. 

1.4 As far as “asset realization basis” was concerned, the Letter provided: “Our firm in the above bankruptcy case shall according to the total amount of the asset as realized by the trustees in the work as mentioned above, charge the professional services fees based upon the fees schedule below (excluding disbursement):”

1.5 As far as “time basis” was concerned, the Letter provided: “If your claims in the above bankruptcy case are fully paid (the relevant claims will have to be approved and accepted by the Trustees), (you may) choose to calculate our firm’s professional services fees based upon the time required by the relevant professional person to deal with the above bankruptcy case, plus disbursements.  The professional services fees hourly charge of the relevant person is compiled according to the nature of work (carried out) by individual person, the required professional knowledge and experience.”

1.6 The Letter next provided for the payment of the Deposit before the carrying out of any work.

1.7 Lastly, the Letter requested “your esteemed company sign and return the duplicate of this letter as enclosed in this letter, to confirm acceptance by your esteemed company of our firm’s professional services and the fees charging basis.”

13.  Although the Letter was addressed to “Mr. Lau Chun Ming, Sam Woo Marine Works Limited” and despite the Letter requested “your esteemed company” to sign the duplicate, only the Plaintiff’s name was typed up at the signature page for him to sign.

14.  The Implied Term was pleaded in paragraph 8 of the Re-Amended Statement of Claim (“SOC”).  In gist, the Plaintiff pleaded the Defendant covenanted that Lai and Haughey undertook to carry out their duties as Trustees with proper skill and competence and with reasonable care and skill in (i) investigating, locating, tracing and recovering the property of Ma, (ii) keeping the Plaintiff informed of possible claims and actions for recovering and/or realizing the property of Ma and their respective limitation periods and (iii) bringing claims and actions for recovering and realizing the property of Ma with due expedition and diligence within the limitation periods.

15.  After reciting a series of events under the section “Recovery Actions Becoming Time Barred” which tended to accuse Lai and Haughey of having been derelict in their duties, the Plaintiff pleaded at paragraph 44 of the SOC that the Defendant was in breach of the Contract.  Most of the alleged breaches particularized under that paragraph were in substance failures of Lai and Haughey save for paragraph 44(t) in which the breach pleaded against the Defendant is its failure to ensure the two would act with reasonable skill and care in their position as the 1^st Trustees.  As succinctly summarized in paragraph 10 of the Plaintiff’s Opening Submissions, the breach relied upon by the Plaintiff is that the Recovery Actions were discovered and/or proceeded with by the 3^rd Trustees but were not discovered, followed up, investigated and/or proceeded with by the 1^st Trustees during the nearly 7 years of their trusteeship.

III.  The Defendant’s case

16.  As equally succinctly summarized in paragraph 2 of the Defendant’s Closing Submissions, the 5 defences to the Plaintiff’s claim are:

1.1 There is no contract between the Plaintiff and the Defendant.

1.2 If there is a contract as alleged, it relates only to the Secured Assets. The subject matter of the Recovery Actions (“Impugned Matters”) are not part of the Secured Assets and therefore do not fall within the scope of any contract.

1.3 Any contract does not include the term as alleged.

1.4 There has been no breach.

1.5 There is a Release which is complete and absolute, and the effect of it is that the Defendant must be released as well.

17.  This court will examine each of the defences in detail when deliberating on the issues raised by them.

IV.  The Issues and Witnesses

18.  Accordingly, the major issues for determination by this court are:

a. whether the Contract existed between the Plaintiff and the Defendant; (“Issue 1”)

b. if so, what was the scope or ambit of the Contract; (“Issue 2”)

c. whether the Defendant owed a contractual duty to ensure that its partners and staff ie the 1^st Trustees and the other staff performed their duties with proper skill and competence and in a reasonable manner and/or with reasonable care and skill; (“Issue 3”)

d. whether the Defendant was in breach of the Contract or whether the 1^st Trustees’ performance of their duty was constricted by the alleged lack of funding available to them; (“Issue 4”)

e. whether the Defendant is released from any contractual liability as a result of the Release granted to the 1^st Trustees.  (“Issue 5”)

19.  At trial, each side called 1 witness:

a. The Plaintiff himself.

b. Haughey on behalf of the Defendant.

20.  Given that the material events vis-à-vis the Plaintiff and the Defendant took place well over 10 years ago, the witnesses’ recollection of the events is understandably imperfect, if not patchy.  Fortunately, the contemporaneous documentation is well preserved.  This court has carefully considered the testimony of the 2 witnesses and assessed it against the documentary evidence and the known and undisputed circumstances of this case.  This court has in particular considered the inherent probabilities or otherwise of the witnesses’ testimony and assessed their credibility accordingly, if and in so far as there is a conflict or potential conflict between the two. 

V. Deliberation

Issue 1

21.  The Defendant’s contention runs like this.

22.  The Letter was an offer addressed to Sam Woo Marine Works Limited (“Sam Woo”) and it was Sam Woo who was requested to confirm its acceptance of the offer by signing and returning the duplicate letter to the Defendant.  What happened was that the Plaintiff had amended the Letter by crossing out Sam Woo’s name on the 1^st page, signed it personally on 21 November 2002 but only returned it to the Defendant on the next day.  In the meantime, the 1^st Trustees were appointed at the first meeting of creditors in the morning of 21 November 2002.

23.  According to Mr Manzoni SC, the first reason why there is no contract is that the amendment to the Letter changed the offer and was effectively a counter-offer.  The Plaintiff accepted in evidence that the Defendant had made a mistake when drafting the Letter—it should have been addressed to him.  The change of a contracting party is a fundamental issue which cannot be done unilaterally.  The change amounts to a counter-offer which was never accepted by the Defendant and hence no contract existed between the Plaintiff and the Defendant.

24.  The second reason why there is no contract concerns the timing of the acceptance.  Even if the amendment does not amount to a counter-offer, the original offer contained in the Letter was not accepted by the Plaintiff until after the appointment of the 1^st Trustees—the 1^st Trustees were appointed in the morning of 21 November 2002 at the first meeting of creditors but the Letter signed by the Plaintiff and the cheque for the Deposit were only delivered to the Defendant’s office the following morning.  The late acceptance by the Plaintiff of the offer means there was no contract with the Defendant regarding the appointment of Lai and Haughey as the 1^st Trustees.  At paragraph 12 of the Defendant’s Closing Submissions, it is said that the 1^st Trustees’ appointment “was entirely unconnected to any contract”.

25.  This court does not accept the Defendant’s contention.

26.  To start with, as submitted by Mr Coleman SC, the Defendant’s suggestion that the Letter was addressed to Sam Woo so that the offer contained in the Letter was made to the company rather than the Plaintiff himself does not make sense.  The reasons are these.

27.  On the Plaintiff’s uncontradicted evidence, the Letter was prepared and sent out on behalf of the Defendant after Yeung’s meeting with the Plaintiff.  The meeting was arranged through the introduction of the Plaintiff’s accountant friend for the purpose of engaging the Defendant to recover the monies owed to him by “taking over, investigating, tracing and dealing with” the assets of Ma. The impending bankruptcy proceedings instituted by the Plaintiff against Ma were certainly mentioned at that meeting, as well as the suggestion by Yeung that the Plaintiff should consider appointing Lai and Haughey as the trustees in bankruptcy of Ma, should he be adjudicated bankrupt.  This is in fact self-evident from the contents of the Letter which repeatedly referred to the bankruptcy case against Ma. 

28.  Hence, Yeung knew that the party with claims against Ma, who had already obtained a charge on some of Ma’s assets and who had filed a bankruptcy petition against him was the Plaintiff himself.  There is no suggestion that Sam Woo was a creditor of Ma—it had no claim against him nor any interest in his bankruptcy estate or the Charged Properties.  In these circumstances, the only logical contracting party to engage the Defendant must be the Plaintiff personally—there was simply no reason for the Defendant to make any offer to Sam Woo.  Further, the Defendant had typed the name of the Plaintiff at the signature block of the Letter—if the Letter had been intended to be an offer to Sam Woo, it would have been drafted to make clear that the Plaintiff was signing “for and behalf of” Sam Woo.

29.  Even if, as contended by Mr Manzoni SC, the Letter had been mistakenly drafted as an offer addressed to Sam Woo, as part of the process of construction, the court has power to correct obvious mistakes and thus, the court may correct a mistaken reference to a party or a misnomer in a contract: Lewison The Interpretation of Contracts 6th Ed pp 491 and 498; Nittan (UK) Ltd v Solent Steel Fabrications Ltd [1981] Lloyd’s Rep 633, 637 (CA); Chitty on Contracts 33^rd Ed Vol 1 para 13-092.

30.  To conclude, on a proper construction of the Letter, this court finds that the Letter, as an offer, was addressed to the Plaintiff personally instead of Sam Woo.  That disposes of the first reason.

31.  As far as the second reason is concerned, this court agrees with Mr Coleman SC that the point is a red herring. 

32.  By the Letter, the Defendant requested the signing and returning of a duplicate of it to confirm the Plaintiff’s acceptance of its professional services and the fees charging basis.  But that does not mean the offer contained in the Letter could only be accepted in that way and not, for instance, by conduct, as long as the conduct amounts to a final and unqualified expression of assent to the offer: Chitty on Contracts 33^rd Ed Vol 1 para 2-026.  Further, as a matter of law, even a prescribed mode of acceptance is not complied with, an offeror ie the Defendant would no doubt be bound by the contract if he had acquiesced in a different mode of acceptance: Chitty on Contracts 33^rd Ed Vol 1 para 2-067.

33.  In the present case, the conduct of the Plaintiff and the Defendant unequivocally shows that they have come to an agreement prior to or at the first creditors’ meeting on 21 November 2002.  As far as the Plaintiff is concerned, he attended the meeting and voted in favour of the appointment of Lai and Haughey as the 1^st Trustees.  As far as the Defendant is concerned, since there was no suggestion of any private contact or discussion between the Plaintiff and Lai or Haughey prior to 21 November 2002, the only reasonable inference is that it was the Defendant who arranged for Lai to attend the meeting and procured Lai and Haughey to accept the appointment.  To suggest that Lai and Haughey’s appointment as the 1^st Trustees was entirely unconnected with any contract is to invite this court to ignore the stark commercial reality—without any agreement between the Plaintiff and the Defendant, none of the above would have happened. 

34.  In any event, no time limit was set in the Letter for the Plaintiff to sign and return a duplicate of it to the Defendant.  Hence, even if the signing and returning of a duplicate to the Defendant was the only prescribed mode of acceptance and the Defendant had not acquiesced in a different one, that mode of acceptance had been complied with by the Plaintiff on 22 November 2002. Hence, at most, the Contract came into existence on 22 November 2002 and the relationship between the Plaintiff and the Defendant, particularly the scope of the Defendant’s professional services and the fees charging basis, were governed by its terms.

35.  Issue 1 is therefore decided in the Plaintiff's favour.

Issue 2

36.  The issue is whether the Contract covered the Defendant’s professional services in relation to the Secured Assets only, as contended for by the Defendant, or both the Secured Assets and Ma’s bankruptcy generally, as contended for by the Plaintiff.

37.  As a preliminary observation, just from considering the contents of the Letter, it would appear that the Plaintiff’s contention is correct.  Under the Letter, the Defendant offered its partners Lai and Haughey to act as the joint and several trustees in Ma’s bankruptcy proceedings should they be appointed and in addition to assist the Plaintiff to deal with the Secured Assets.  There were two alternative bases for charging ie assets realization basis and time basis.  The language used was either “Our firm in the above bankruptcy case shall …” or “If your claims in the above bankruptcy case are fully paid … (you may) choose to calculate our firm’s professional services fees upon the time required by the relevant professional person to deal with the above bankruptcy case”[3] thereby indicating that the Contract was intended to also cover work done in relation to Ma’s bankruptcy.

38.  The issue raised by the Defendant’s contention was not pleaded in the Amended Defence and this prompted a justifiable complaint by Mr Coleman SC based on an oft-cited passaged of Ma CJ in Kwok Chin Wing v 21 Holdings Ltd (2013) 16 HKCFAR 663, at [21]:

“It should by now really be quite unnecessary to issue yet another reminder on the rationale behind pleadings. The basic objective is fairly and precisely to inform the other party or parties in the litigation of the stance of the pleading party (in other words, that party’s case) so that proper preparation is made possible, and to ensure that time and effort are not expended unnecessarily on other issues: Wing Hang Bank Ltd v Crystal Jet International Ltd. It is the pleadings that will define the issues in a trial and dictate the course of proceedings both before and at trial. Where witnesses are involved, it will be the pleaded issues that define the scope of the evidence, and not the other way round. In other words, it will not be acceptable for unpleaded issues to be raised out of the evidence which is to be or has been adduced …”

39.  In response, Mr Manzoni SC submitted that it is not necessary to plead that point as the scope of a contract is a matter of law but nonetheless applied to amend the Amended Defence in his Reply Closing Submissions.  The proposed amendment reads:

“11A. To the extent that any contract did come into existence, it was a contract only in respect of the Secured Assets. The matters complained of in the Amended Statement of Claim relate to unsecured assets, and do not fall within the scope of any contract in any event.”

40.  The proposed amendment in effect treats the point as if it is a pure question of law without any need to plead any facts in support but in his Closing Submissions, Mr Manzoni SC in fact made various references to the oral evidence and documentation.

41.  It is trite that the construction of written instruments is a question of mixed law and fact.  The expression ‘construction’ as applied to a document includes two things, first, the meaning of the words; and, secondly, their legal effect, or the effect which is to be given to them.  Construction becomes a question of law as soon as the true meaning of the words in which an instrument has been expressed and the surrounding circumstances, if any, have been ascertained as facts.  However, the meaning of an ordinary English word, of technical or commercial terms and of latent ambiguities, and the discovery of the surrounding circumstances (when they are relevant) are questions of fact: Chitty on Contracts 33^rd Ed Vol 1 para 13-044.

42.  Since the construction of written contracts is a question of mixed law and fact and the relevant factual matrix includes absolutely anything which would have affected the way in which the language of the document would have been understood by a reasonable man, subject to the requirement that it should have been reasonably available to both parties[4], this court cannot accept the submission that ascertaining the ambit of a contract is a pure question of law.  In other words, the point taken by the Defendant must be properly pleaded.

43.  The next question is whether this court should exercise its discretion to allow the proposed amendment so late in the day that when closing submissions from both sides had already been filed.  Naturally, Mr Coleman SC submitted that the application should be refused.

44.  In the words of Lord Griffiths in Ketteman v Hansel Properties Ltd [1987] AC 189, 220:

“Whether an amendment should be granted is a matter for the discretion of the trial judge and he should be guided in the exercise of the discretion by his assessment of where justice lies. Many and diverse factors will bear upon the exercise of this discretion. I do not think it possible to enumerate them all or wise to attempt to do so. But justice cannot always be measured in terms of money and in my view a judge is entitled to weigh in the balance the strain the litigation imposes on litigants, particularly if they are personal litigants rather than business corporations, the anxieties occasioned by facing new issues, the raising of false hopes, and the legitimate expectation that the trial will determine the issues one way or the other. Furthermore to allow an amendment before a trial begins is quite different from allowing it at the end of the trial to give an apparently unsuccessful defendant an opportunity to renew the fight on an entirely different defence.”

45.  In the present case, it seems to this court justice clearly lies in favour of disallowing this late application to amend.  The prejudice to the Plaintiff is obvious: had the point been raised in the Defence or the Amended Defence, the Plaintiff’s legal advisers would likely have given more thoughts to what sort of background information impinging on the ambit of the Contract should be introduced as evidence, and, as a consequence, the evidence to be presented at the trial and his legal team’s preparation for the trial generally would, or, at least, might have been different.  The lack of advance notice that the point would be taken by the Defendant means the Plaintiff has been prejudiced since he would not have been able to deal with the point as fully as would be the case if the point had been pleaded earlier.  

46.  For the above reasons, this court is not minded to give leave to amend and the application is accordingly dismissed.  If so, it is not permissible for the Defendant to run the defence that the Contract related only to the Secured Assets.

47.  That disposes of Issue 2.

Issue 3

48.  The issue here is whether the Contract contained the Implied Term contended for by the Plaintiff.

49.  This court will first remind itself of the applicable principles, familiar though they might be.

50.  The default position is that nothing is to be implied into the contract: Lewison The Interpretation of Contracts 6^th Ed at para 6.04; Crema v Cenkos Securities Plc [2010] EWCA Civ 1444 at [38].

51.  In Attorney General of Belize v Belize Telecom Ltd [2009] 1 WLR 1988 at [17], Lord Hoffmann made a similar observation:

“The question of implication arises when the instrument does not expressly provide for what is to happen when some event occurs. The most usual inference in such a case is that nothing is to happen. If the parties had intended something to happen, the instrument would have said so. Otherwise, the express provisions of the instrument are to continue to operate undisturbed. …”

52.  In Philips Electronique Grand Public SA v British Sky Broadcasting Ltd [1995] EMLR 472 at 481, Sir Thomas Bingham M.R. warned the Courts against the temptation of too eagerly implying a term into a contract in order to reflect the perceived merits of the situation before them:

“The courts’ usual role in contractual interpretation is, by resolving ambiguities or reconciling apparent inconsistencies, to attribute the true meaning to the language in which the parties have themselves expressed their contract. The implication of contract terms involves a different and altogether more ambitious undertaking: the interpolation of terms to deal with matters which, ex hypothesi, the parties themselves have made no provision. It is because the implication of terms is so potentially intrusive that the law imposes strict constraints on the exercise of this extraordinary power ...

The question of whether a term should be implied, and if so what, almost inevitably arises after a crisis has been reached in the performance of the contract. So the court comes to the task of implication with the benefit of hindsight, and it is tempting for the court then to fashion a term which can reflect the merits of the situation as they then appear. Tempting, but wrong …” (emphasis added)

53.  In Hong Kong, the leading authority is Kensland Realty Ltd v Whale View Investment Ltd & Another (2001) 4 HKCFAR 381 in which the Court at [23], adopting the approach of the majority in BP Refinery (Westernpoint) Pty Ltd v Shire of Hastings (1978) 52 ALJR 20 at 26, held that in order for a term to be implied into a contract, the following conditions must be satisfied:

(1) It must be reasonable and equitable.

(2) It must be necessary to give business efficacy to the contract, so that no term will be implied if the contract is effective without it.

(3) It must be so obvious that it goes without saying.

(4) It must be capable of clear expression.

(5) It must not contradict any express term of the contract. 

54.  In the recent decision of the Privy Council in Nazir Ali v Petroleum Company of Trinidad and Tobago [2017] UKPC 2, Lord Hughes (with whom Lord Neuberger, Lord Clarke and Lord Carnwath agreed) commented at [7] on what were essentially conditions (2) and (3) above as thus:

“… It is enough to reiterate that the process of implying a term into the contract must not become the re-writing of the contract in a way which the court believes to be reasonable, or which the court prefers to the agreement which the parties have negotiated. A term is to be implied only if it is necessary to make the contract work, and this it may be if (i) it is so obvious that it goes without saying (and the parties, although they did not, ex hypothesi, apply their minds to the point, would have rounded on the notional officious bystander to say, and with one voice, ‘Oh, of course’) and/or (ii) it is necessary to give the contract business efficacy. Usually the outcome of either approach will be the same. The concept of necessity must not be watered down. Necessity is not established by showing that the contract would be improved by the addition. The fairness or equity of a suggested implied term is an essential but not a sufficient pre-condition for inclusion. ...” (emphasis added)

55.  In the Opening Submissions, instead of explaining how the 5 conditions endorsed in Kensland Realty Ltd v Whale View Investment Ltd & Another could be satisfied on the facts of the present case, the Plaintiff referred this court to A & J Fabrications Ltd v Grant Thornton [1998] 2 BCLC 227 in which the defendant firm applied to strike out the plaintiffs’ statement of claim on the basis that it disclosed no reasonable cause of action, and failed.

56.  In A & J Fabrications Ltd v Grant Thornton, the plaintiffs, who were the majority creditors of a company in liquidation, entered into a contract with the defendant accounting firm, whereby in consideration of payment of the defendant’s fees up to a certain amount, the defendant agreed that an insolvency practitioner from its firm would seek appointment as liquidator of the company.  An insolvency practitioner from the defendant was duly appointed.  He was subsequently replaced by another practitioner from the defendant firm.  In the statement of claim, the plaintiffs pleaded that in breach of the contract (and a duty of care), the defendant had failed to supply the services required of it.

57.  In order to understand the limited relevance of A & J Fabrications Ltd v Grant Thornton in this trial, it is necessary to set out the principles governing striking out applications for no reasonable cause of action and the terms of the contract pleaded by the plaintiffs in A & J Fabrications Ltd v Grant Thornton.

58.  It is well-established that:

a. a reasonable cause of action means a cause of action with some chance of success when only the allegations in the pleading are considered;

b. the court will only exercise the power to strike out where it is plain and obvious that the claim in question is unsustainable, the pleading is unarguably bad and it must be impossible, not just improbable, for the claim to succeed;

c. disputed facts will be taken in favour of the party sought to be struck out.

Hong Kong Civil Procedure 2019 Vol 1 paras 18/19/4-5

59.  As for the terms of the contract pleaded by the plaintiffs in A & J Fabrications Ltd v Grant Thornton, the same can be gleaned from the judgment of Jacob J at 229 a-g:

“ By a contract made or evidenced by letters from the Plaintiff’s solicitors, Jordans, to Mr. David Thomas, for and behalf of the Defendant … in consideration of the Plaintiff paying the Defendant fees up to an initial limit of £5,000 the Defendant agreed:

1. That in accordance with the Plaintiff’s nomination and voting instructions that he be appointed as liquidator of the company contained in the proxy form completed by the Plaintiff, Mr. Eric Edwards of the Defendant will seek appointment as liquidator of the company at the adjourned meeting of the creditors of the company on the 3^rd October, 1990 …

… and if Mr. Eric Edwards of the Defendant was appointed as liquidator of the company the Defendant would investigate, and would encourage and assist the Official Receiver to investigate, the trading history of the company and the financial affairs of the company and the conduct of the directors of the company … so that the assets of the company could be secured and realised and distributed to creditors of the company, including and in particular the Plaintiff.

Pursuant to and in accordance with the contract, Mr. Eric Edwards of the Defendant was duly appointed as liquidator of the company at the adjourned meeting of creditors that was held on the 3^rd October, 1990.

5. It was an implied term of the contract … to give the same business efficacy and/or by operation of law, the Defendants would act with reasonable skill and care.” (emphasis added)

60.  Based on what had been pleaded in the statement of claim, and when only the allegations in the statement of claim were considered, it is difficult to see how Jacob J could have concluded that it was plain and obvious that the claim in question was unsustainable, the pleading was unarguably bad and it was impossible for the claim to succeed.  While the facts of A & J Fabrications Ltd v Grant Thornton may appear to be similar to the present case, the issues for determination were very different and this court cannot find any assistance from that case in resolving the issue at hand ie whether the alleged term should be implied into the Contract.  As Jacob J observed at 230 h-i:

“… The pleaded contract is, in short, that the employee/liquidator undertakes to do a proper job as liquidator. That is what Grant Thornton contracted would happen.”

61.  In the present case, the Plaintiff relies on the Implied Term that the Defendant covenanted Lai and Haughey would act with reasonable skill and care in their position as the 1^st Trustees but failed to ensure the two would do so.  The Plaintiff bears the burden of showing such a term should be implied into the Contract by demonstrating the 5 conditions set out above are satisfied.

62.  In his Closing Submissions, the Plaintiff recited some of the general principles governing the liability of a partnership firm for acts done by its partners in the ordinary course of business or with the authority of his co-partners and then boldly asserted at paragraph 50 that:

“It must therefore be necessarily implied in the Contract that by agreeing to provide Mr Lai and Mr Haughey as the trustees in bankruptcy and to charge Mr Lau for professional service under the Contract, Deloitte ought to ensure that the trustees provided by them would exercise reasonable skill and care.”

63.  In this court’s view, the Plaintiff has at least failed to satisfy that conditions (2) and (3) are met; in other words, the Plaintiff has failed to demonstrate why the Implied Term is necessary to give business efficacy to the Contract or that it must be so obvious that it goes without saying. 

64.  As submitted by the Defendant, which this court accepts, the BO already provides a scheme for the supervision and control of trustees in bankruptcy by the creditors and the court.  In particular, the creditors have the right to appoint and remove trustees in bankruptcy and the latter are required to have regard to directions given by the creditors: sections 17, 82 and 96 BO.  As far as the court is concerned, it is empowered to reverse or modify the acts or decisions of the trustees, to inquire into their conduct and take such action as may be deemed necessary: sections 83 and 84 BO.  The court is also empowered to remove a trustee and appoint another person in his place: section 96 BO.

65.  As far as general partnership law is concerned, this court needs only recite 2 paragraphs from the Court of Appeal’s judgment dated 12 October 2015 in the present case ("CA Judgment"):

“4.8 In my view the plaintiff’s tortious claim against the defendant which is a partnership suffers from a fundamental defect. By reason of the nature of the joint and several liability of the partnership that is said to have arisen as a result of the alleged negligence of two of its partners, the release of liability of these two partners under the Release Order will likewise release that of the partnership as well.

4.9 The starting point is that partners are jointly and severally liable to any persons not themselves partners for the torts of any one of them acting in the ordinary course of the business of the firm, or with the authority of his co-partners: see sections 12 and 14 of the Partnership Ordinance (Cap. 38) and Clerk & Lindsell on Torts 21^st Ed. para 5―92. Lindley & Banks on Partnership 19^th Ed. para 13―94 stated:

‘ The traditional view has always been that a creditor may discharge a partner from a partnership debt or obligation by means of a release or a covenant not to sue, with differing consequences for the other partners, as Lord Lindley [Clayton v Kynaston (1699) 2 Salk. 573] explained:

‘A release of one partner from a partnership debt discharges all the others; for where several persons are bound jointly, or jointly and severally, a release of one is a release of them all…..’” (emphasis added)

66.  As a matter of general partnership law, but for the effect of the Release under the BO, the Defendant, as a partnership firm, would have been liable for the acts or default of the 1^st Trustees in the administration of Ma’s bankruptcy estate. 

67.  Hence, the Plaintiff’s interest as a creditor was protected not just by the statutory scheme under the BO, but also by the general law on partnership. If the Plaintiff wished to have the added comfort of a term in the Contract in which the Defendant covenanted that Lai and Haughey would act with reasonable skill and care in their position as the 1^st Trustees, he could have negotiated an express term to that effect.  But that had not been not done. As necessity is not established by showing that a contract would be improved by the addition, it is difficult to see how the Plaintiff can argue that the Implied Term was necessary to make the Contract work or effective.  In this court’s view, the Contract was effective and could work without the Implied Term.  For similar reasons, this court is not satisfied that the Implied Term was so obvious that it goes without saying. The Plaintiff himself might have rounded on the notional officious bystander to say “Oh, of course” to the Implied Term.  But that is not the test—the test is both parties would have done so, and it is difficult to see why the Defendant would have said to the notional officious bystander “Oh, of course”.

68.  That disposes of Issue 3 in the Defendant’s favour.

Issue 4

69.  Given this court’s conclusion that the Contract did not contain the Implied Term, obviously the Defendant could not have been in breach of a term which ex hypothesi was not part of the Contract.  And since the Plaintiff has not pleaded that the Defendant was in breach of any other term, Issue 4 must be decided in favour of the Defendant. 

70.  In any event, in this court’s view, the Plaintiff has not been able to satisfactorily demonstrate in what way(s) the 1^st Trustees had failed to carry out their duties with reasonable care and skill.  At the beginning of Section C of the Plaintiff’s Closing Submissions, the crux of his complaint against the 1^st Trustees was summarized as thus:

“70. Deloitte was in breach of the Contract for failure to ensure that the 1^st Trustees carried out their duties with reasonable skill and care.

71. Mr Lau’s claim arises from the facts that various recovery actions discovered and/or proceeded with by the 3^rd Trustees were not discovered, followed up, investigated and/or proceeded with by the 1^st Trustees during the nearly 7 years of their trusteeship …

…

75. In evidence, Mr Haughey did not disagree with the actions that were ultimately taken by the 3^rd Trustees to recover assets. It is self-evident that those actions (and the enquiries that led to them) should have been undertaken by the 1^st Trustees too, as they arose from materials already supplied to them.

76. A trustee-in-bankruptcy (in broad terms) is under a positive duty to realize the bankrupt’s property for the benefit of creditors as a whole, and in so doing his duties will include an investigation into the bankrupt’s available assets. Such investigation includes carrying out an inquiry as to what assets may have been dissipated.” (emphasis added)

71.  With respect, that is far too crude a basis on which to accuse 2 professional trustees in bankruptcy of failing to carry out their duties with reasonable skill and care.  The burden of proof falls squarely on the Plaintiff to show what the 1^st Trustees did or did not do had fallen short of the requisite standard of reasonable skill and care.  As submitted by Mr Manzoni SC, it is not sufficient to simply look at what the 3^rd Trustees did years later, with different funding, and in different circumstances, and to assert that it is self-evident that those actions and the enquiries that led to them should have been undertaken by the 1^st Trustees too.  In particular, there has been no serious attempt by the Plaintiff to take into account the commercial reality facing the 1^st Trustees ie the limited funding available to them and the unwillingness of the Plaintiff to provide the additional funding requested by the 1^st Trustees, as testified by Haughey, or to analyse the potential costs and benefits of the actions that the 1^st Trustees are now accused of having failed to take.

72.  There is considerable force in Mr Manzoni SC’s submission.

73.  Subject to the provisions of the BO and the dominant/guiding duty of recovering, securing and duly applying the trust fund, a trustee in bankruptcy, like any other trustees, has a discretion as to the mode, manner and time at which he carries his duty into effect and shall use such discretion in the general management of the bankruptcy estate and its distribution among creditors: Re Brogden (1888) 38 Ch D 548, 571 (CA); section 82(4) BO.  The court will not interfere with the exercise of his discretion unless the trustee in bankruptcy is doing that which is so utterly unreasonable and absurd that no reasonable man would so act: Re Peters; Ex p Lloyd (1882) 47 LT 64, 65 (Jessel MR).  In the context of an application under section 83 BO, it has been held inappropriate and unjust for the court to interfere with the decision of the trustees in bankruptcy unless it is shown that the decision is perverse or clearly wrong—in other words, unless the trustees’ decision is utterly unreasonable and absurd and that no reasonable trustee would so act, the court would not interfere: Re Chung Kau, unrep, HCB 581/2003, 23 February 2004; DHCJ Jeremy Poon (as he then was) at [13]; Re Lau William John [2017] 3 HKLRD 205 at [13]. 

74.  In carrying out his duties and the exercise of his discretion, a trustee may be, and often are, subject to practical constraints.  In Mannigel v Aitken (1983) 77 FLR 406, 409, Smithers J of the Federal court of Australia observed:

“ According to Halsbury’s Laws of England (3^rd ed) Vol 38, p 967, a trustee must take all reasonable and proper measures to obtain possession of the trust property and to get in all debts and funds due to the trust estate, and to preserve it, and to secure it from loss. He must take reasonable precautions to see the property is not stolen or lost by default. …

… The Trustee is required to act diligently and prudently in the exercise of his discretion in deciding matters as they arise in the course of administration of the estate. He may be constrained to act by reference to the knowledge which he has of the circumstances balancing the benefit of further inquiry against further delay and the further expense to the estate, to the creditors and possibly to the debtor if there is a surplus in the estate.” (emphasis added)

75.  The Plaintiff has asserted in the section entitled “Deloitte’s allegation of lack of funding” in his Closing Submissions that the 1^st Trustees’ account had not been lacking funds: as at 21 December 2004, there were about HK$472,000 in the 1^st Trustees’ account; as at 21 March 2005, there were about HK$519,000; as at 13 October 2006, the 1^st Trustees had realized assets of approximately HK$861,000 (before deducting any expenses); and when they handed over to the 2^nd Trustees in the 2^nd half of 2009, the bankruptcy estate had cash of HK$800,000 (before deduction of expenses). 

76.  However, if one looks at the contemporaneous documents, the picture revealed is very different.  Just to take a few examples.

a. In the “Notes for the meeting with Mr Lau to be held on 7 January 2005”, it was stated:

“Funding for the trustees

• Our time costs: approx. HK$530,000 (since appointment), received from Mr. Lau a non-refundable deposit of HK$100,000 at the beginning of our appointment

• Funds in trustees’ account: approx. HK$472,000 (as at 21/12/2004)

• Need additional deposit of HK$200,000 to HK$300,000”

b. In an internal memo dated 24 February 2005 at 6:45pm, it was recorded that the Plaintiff would like to concentrate on HK assets (of Ma) first and therefore, they would like to hold the USA assets search.

c. In the “Notes for the meeting with Mr Lau to be held on 14 April 2005”, it was stated:

“Funding for the trustees

• Our time costs as at 31/3/2005: HK$635,927 (since appointment), of which HK$239,374 relates to secured assets and HK$396,553 relates to other assets and general issues

• Received from Mr. Lau a non-refundable deposit of HK$100,000 at the beginning of our appointment

• Funds in trustees’ account: approx. HK$519,000 (as at 21/3/2005)

• Need additional deposit of HK$200,000 to HK$300,000 from Mr. Lau to cover our works carried out and to be carried out in relation to secured assets”

d. In Haughey’s affidavit dated 13 October 2006 in support of the 1^st Trustees’ application to object to Ma’s discharge from bankruptcy on the ground of Ma’s failure to cooperate, it was indeed stated that 1^st Trustees had realized assets of approximately HK$861,000 but that was before deducting any expenses.  Just a few months earlier, in the Defendant’s letter dated 30 June 2006 to the Plaintiff seeking his approval of the Defendant’s remuneration up to 31 May 2006 of HK$463,695 and expenses of HK$11,815.99, the Plaintiff refused, by failing to sign the resolution of the creditor’s committee.

e. In the Defendant’s letter dated 7 April 2008, the Plaintiff was asked to confirm his acceptance of the Defendant’s fees in relation to the Secured Assets in the sum of HK$387,300 (minus HK$100,000 costs on account), plus disbursements of HK$2,056.80, the Plaintiff refused to do so.  By an email dated 17 June 2008, the Defendant requested the Plaintiff to pay its fees based on realization ie HK$381,250 plus disbursements of HK$2,056.80.  Again, the Plaintiff refused to do so, as evidenced by an email to the Plaintiff dated 8 January 2009 and a letter dated 10 March 2009 in which the Defendant requested the settlement of its fees and disbursement regarding Secured Assets.

f. Lastly, in Recitals (F) and (G) to the Settlement Deed, it was recorded that the Plaintiff had only paid a meagre sum of HK$63,450[5] to the 1^st Trustees to finance the pursuing of claims etc to realise and recover Ma’s estate in the bankruptcy, while he had paid close to HK$900,000 to the 3^rd Trustees.  With the funding available, the 3^rd Trustees were, not surprisingly, able to pursue the Recovery Actions.

77.  It can be readily seen from the above that the suggestion that the 1^st Trustees were well-funded and were able to do what the 3^rd Trustees had done rings hollow.  So does the Plaintiff’s testimony that had he been asked for funding by the 1^st Trustees, he would have agreed to do so.  This court has no difficulty rejecting the Plaintiff’s testimony in this regard as wholly incredible and accepting Haughey’s testimony that the 1^st Trustees’ action (taken or not taken) in the course of Ma’s bankruptcy was hampered by their limited funds and the Plaintiff’s refusal to provide the necessary funding to them.  This court further rejects the Plaintiff’s suggestion that the Defendant/1^st Trustees had not asked for funding to finance the investigation and possible legal actions in relation to the Impugned Matters.  As a matter of inherent probabilities and common sense, why would any professional trustees and/or their firms not ask for funding if a creditor had indicated expressly or impliedly his willingness to provide it?

78.  To conclude, this court is not satisfied the 1^st Trustees had failed to carry out their duties with reasonable care and skill, as claimed by the Plaintiff.  For this reason also, Issue 4 must be decided in favour of the Defendant.

Issue 5

79.  Section 94(3) of BO provides: 

“An order of the court releasing the trustee shall discharge him from all liability in respect of any act done or default made by him in the administration of the affairs of the bankrupt, or otherwise in relation to his conduct as trustee, but any such order may be revoked on proof that it was obtained by fraud or by suppression or concealment of any material fact.”

80.  The intention of section 94(3) is “to wipe the slate completely clean so far as the trustee is concerned, so that he may thereafter pay no thought to the previous course of his actions as the trustee in bankruptcy”: In re Munro [1981] 1 WLR 1358, 1362F-H. 

81.  In the CA Judgment, the Court of Appeal struck out the Plaintiff’s tortious claim as disclosing no reasonable cause of action. The decision was based upon the effect of the Release.  The Court held that the Release relieved the 1^st Trustees of all liability. Consequently, it had the effect of releasing the Defendant from all liability.  Any other conclusion would mean the 1^st Trustees would subsequently become liable as partners of the Defendant, and the effect of the Release would be nullified.

82.  At [4.9]-[4.10] of the CA Judgment, Cheung JA said this:

“4.9 The starting point is that partners are jointly and severally liable to any persons not themselves partners for the torts of any one of them acting in the ordinary course of the business of the firm, or with the authority of his co-partners: see sections 12 and 14 of the Partnership Ordinance (Cap. 38) and Clerk & Lindsell on Torts 21^st Ed. para 5―92. Lindley & Banks on Partnership 19^th Ed. para 13―94 stated:

‘ The traditional view has always been that a creditor may discharge a partner from a partnership debt or obligation by means of a release or a covenant not to sue, with differing consequences for the other partners, as Lord Lindley [Clayton v Kynaston (1699) 2 Salk. 573] explained:

‘A release of one partner from a partnership debt discharges all the others; for where several persons are bound jointly, or jointly and severally, a release of one is a release of them all…..’ ’  [Emphasis added]

4.10     The wording of section 94(3) of the Bankruptcy Ordinance is clear: the release order will release the trustee from all liability in respect of any act done or default made by him in the administration of the affairs of the bankrupt. …” 

83.  The CA Judgment was only concerned with the Plaintiff’s tortious claim because the Defendant only sought to strike out his tortious claim on appeal.  But as Mr Manzoni SC submits and this court agrees, the rationale is equally applicable to any claim in contract.  As the learned editors of Lindley & Banks on Partnership 20^th Ed put it at para 13-97, contractual and tortious liabilities stand on the same footing as far as the effect of a release is concerned.  If any claim in contract can be enforced against the Defendant, it is tantamount to holding the 1^st Trustees liable by reason of sections 8 and 11 of the Partnership Ordinance.  To continue to impose liability on the 1^st Trustees after the Release in this way undermines the absolute nature of a release under section 94 BO.  Consequently, the Release and the CA Judgment also provide a defence by analogy to the Plaintiff’s contractual claim as well.  

84.  For these reasons, Issue 5 must be decided in favour of the Defendant.

VI.  Disposition and costs order nisi

85.  The Plaintiff’s claim against the Defendant is hereby dismissed.  There shall be judgment in favour of the Defendant together with an order nisi that costs of the action be to the Defendant, to be taxed if not agreed, and paid by the Plaintiff forthwith, certificate for counsel. 

86.  Lastly, this court thanks counsel on both sides for their helpful assistance.