HEBEI ENTERPRISES LTD AND OTHERS v. LIVASIRI & CO (A FIRM) AND OTHERS

FACV No. 23 of 2007

IN THE COURT OF FINAL APPEAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION 

FINAL APPEAL NO. 23 OF 2007 (CIVIL)

(ON APPEAL FROM CACV NO. 401 OF 2005)

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J U D G M E N T

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Mr Justice Bokhary PJ:

1.  I agree with the joint judgment of Mr Justice Chan PJ and Mr Justice Nazareth NPJ and the judgment of Sir Gerard Brennan NPJ.

Mr Justice Chan PJ and Mr Justice Nazareth NPJ:

Introduction

2.  These are two appeals arising from the plaintiffs’ claims against two firms of solicitors, the 1^st and 3^rd defendants, in connection with the plaintiffs’ property investment project which had failed to realize.

3.  The 1^st appeal is between the plaintiffs and the 1^st defendant (“Livasiri”).  The plaintiffs made three claims against Livasiri: breach of fiduciary duty as stakeholder and trustee (which was described in the courts below as a “Stakeholder Claim”), negligence (“Negligence Claim”) and breach of fiduciary duty in relation to the sum of $1,200,000 (“Residue Claim”).  At first instance, Deputy High Court Judge Jeremy Poon rejected the Stakeholder Claim but entered judgment for the plaintiffs on the Negligence Claim and the Residue Claim.  In the Court of Appeal (Rogers VP, Le Pichon JA and Hartmann J), the appeal by Livasiri was allowed and the judgment on the Negligence Claim was set aside.  The appeal relating to the Residue Claim was not pursued.  The plaintiffs now appeal to this Court in respect of both the Stakeholder Claim and the Negligence Claim.

4.  The 2^nd appeal is between the 3^rd defendant (“H & C”) and the plaintiffs. The plaintiffs claimed against H & C for breach of fiduciary duty as stakeholder and trustee. The Deputy Judge gave judgment for the plaintiffs and this was upheld by the Court of Appeal.  H & C now appeals to this Court.

Events leading to the joint venture

5.  The plaintiffs are three related investment companies incorporated in Hong Kong but are owned by the Finance Bureau of the Hebei Provincial Government, with officials of that Bureau appointed as shareholders, directors and managers of these companies. The evidence showed that the funds which are the subject matter of this action came from either the 1^st plaintiff or the 3^rd plaintiff and it was the 3^rd plaintiff which had played a more active part in the investment project.

6.  In October 1996, Mr Wang Guangtian (“Mr Wang”) who was a director of all the plaintiffs came to know Mr David Fan (“Mr Fan”), who was a partner of Livasiri.  In November 1996, Livasiri acted for the 3^rd plaintiff in the acquisition of certain premises which were later used as the plaintiffs’ offices. As the plaintiffs were interested in making investments in the property market in Hong Kong, in April 1997, Mr Fan introduced Mr Wang to a Mr Jeffrey She Chin Tong (“Mr She”) who was said to represent two property investment companies, the 5^th defendant and its subsidiary the 6^th defendant which was a BVI company.  These two companies were owned and controlled by a Mr Simon Cheng Kwok Fai.

7.  Various discussions were conducted, mainly between Mr Wang and Mr She with a view to forming a joint venture involving the plaintiffs and the 5^th and 6^th defendants in a project (“the Project”) for the acquisition and redevelopment of a building in Happy Valley called the Happy Mansion (“Happy Mansion”). These discussions resulted in a document which was referred to as “the Acquisition Formula” which purported to set out the understanding of the parties in relation to the Project at that stage.

8.  Basically, it was then envisaged by the parties that the plaintiffs and the companies represented by Mr She would each make a contribution towards a pool of $70 million in a certain ratio as an “acquisition deposit” which was to be used for acquiring all the units of Happy Mansion and that if acquisition of all the units could not be achieved within six months, the parties’ contributions would be returned to them in full. Further, as the judge put it, there were to be two safeguards for the acquisition deposit: first, the firm of solicitors with which the parties’ contributions were to be placed could only release money to the firm of solicitors acting for the owner vendor of any unit upon production of a valid conditional sale and purchase agreement in respect of the unit to be sold; and second, the second firm could not release the money to the owner unless and until the owners of all the units in Happy Mansion had agreed to sell.  The parties were clearly concerned about the risks involved in the handling of such large sums of money and the need to protect against such risks.

9.  The Acquisition Formula reflected only the initial thinking of the parties at a time when they did not have the benefit of legal advice. Changes were later made to this proposal following further discussions. This Acquisition Formula was soon superseded by a shareholders agreement which was prepared on the advice of Livasiri and executed by the parties in the circumstances set out below.

10.  On 13 June 1997, there was a meeting at which Mr Meng Zhan Biao (a director and general manager of the 1^st plaintiff), Mr Wang, Mr She and Mr Fan were present.  Agreement was reached to proceed with the Project with the plaintiffs agreeing to provide $50,000,000 towards the total capital contributions and the companies represented by Mr She agreeing to provide the balance.  After the meeting, on the same day, Mr Meng sought approval from his superior in the Mainland to proceed with the Project.  Approval was indeed given very quickly.

The Shareholders Agreement

11.  During the meeting, Mr Fan advised that a joint venture company be set up for the purpose of this Project.  Livasiri was then instructed to prepare a shareholders agreement for the joint venture. The draft Shareholders Agreement was finalized at another meeting held on 16 June 1997 and signed by Mr Wang on behalf of the 3^rd plaintiff and Mr She on behalf of the 6^th defendant at the meeting but left undated until 3 July 1997.  This was because the shares in the joint venture company (which was then yet to be formed and which was later to become the 7^th defendant (“Sky Grand”)) were only transferred to the 3^rd plaintiff and the 6^th defendant on that date. The 6 month period for the Project thus started to run as from 3 July 1997. 

12.  According to clause 17.1 of the Shareholders Agreement, this agreement represented all the agreed terms and conditions between the parties and replaced all their previous exchanges, understanding and undertakings.  This obviously included the Acquisition Formula. The provisions in this Shareholders Agreement which are relevant to these appeals were as follows:

(1) the 3^rd plaintiff and the 6^th defendant were to hold 70% and 30% respectively in the newly formed joint venture company, Sky Grand (para. 2 of the Preamble);

(2) the parties were to jointly acquire and develop Happy Mansion through Sky Grand (para. 3 of the Preamble) and this was to be the only business of Sky Grand (cl. 2.1);

(3) the parties were to use their best endeavours and most economical means to realize and complete within 6 months the business objective of Sky Grand which was to bind all bona fide owners in the Project with a contract that can be enforced by specific performance or one that has the same effect indirectly (cl. 2.2);

(4) the 3^rd plaintiff was entitled to nominate two directors (and it nominated Mr Wang and Mr Cui Pan Lai (“Mr Cui”)); the 6^th defendant was entitled to nominate one director (and it nominated Mr She) (cl. 6.1); the control and policy of the business was to be determined by the Board of Directors (cl. 7.1);

(5) the operation and transaction of business in relation to the bank account owned by Sky Grand was to be conducted by the joint signatures of the nominees of both parties (cl. 7.3);

(6) the working capital of Sky Grand was to be contributed by the parties either by the subscription of extra shares or by shareholder’s loans in the ratio of 70% and 30%  (cl. 11.2);

(7) any shareholder’s loan would be repayable on demand and be repaid to the parties in the same ratio as their respective contributions; and such loans would carry interest at the best lending rate fixed by the Hong Kong Association of Banks (cl. 11.3(b));

(8) in the event the Project was not completed within 6 months, the 3^rd plaintiff would be entitled to certain rights as against the 6^th defendant with regard to the repayment of its loans and interest (cl. 12).

13.  It can be seen from these provisions that various measures were introduced to protect the interest of the plaintiffs, both in the implementation of the Project as well as in the funds advanced in the event it could not be completed. Some of these measures were clearly inserted for the purpose of protecting the plaintiffs’ interest vis-à-vis the other joint venture partner, the 6^th defendant.

14.  It was clear that the parties had decided that their capital contributions shall take the form of shareholders’ loans to the joint venture company rather than the issue of extra shares and that the 3^rd plaintiff’s and the 6^th defendant’s contributions were to be $50,000,000 and $21,500,000 respectively.

The joint venture company – Sky Grand

15.  Instructions were also given to Livasiri to acquire Sky Grand for use as the joint venture company.  The documents showed that it was Livasiri which handled the preparation and filing of the necessary documentation in connection with the appointment of directors in accordance with the Shareholders Agreement, the appointment of Mr She as the company secretary, and the allotment of subscribers shares to the 3^rd plaintiff and the 6^th defendant.  In fact, Livasiri subsequently submitted a bill of costs to the plaintiffs for these services.  However, no bank account was opened by Sky Grand. There was also no evidence of any board resolution to acquire property or to borrow money from the shareholders or to engage the services of solicitors.

The first remittance from the plaintiffs to Livasiri

16.  Following the meeting on 16 June 1997, in a letter of that date, Livasiri wrote to the 3^rd plaintiff requesting a remittance to it of $5,000,000.  In that letter, Livasiri informed the 3^rd plaintiff that the money was to be the first payment of contribution and that it was to be placed in Livasiri’s bank account.  However, nothing was mentioned as to how the money was to be applied.  In reply, the 1^st plaintiff immediately remitted $5,000,000 to Livasiri (the actual amount received was in fact $100 less because of bank charges).

17.  Upon receipt of the money, on 18 June 1997, Livasiri transferred $5,000,000 to H & C by cheque with a covering letter. Livasiri claimed in that letter that in sending over the money to H & C, it was acting under the instruction of the 3^rd plaintiff. This was denied by the plaintiffs at the trial. As will be seen later, this was an issue which the trial judge considered to be essential to the plaintiffs’ Stakeholder Claim.

18.  The letter to H & C ended with this condition:   

“The cheque is sent to you subject to your firm’s personal undertaking to hold the said sum of money as stakeholders on condition that the said sum of money shall only be released to the Company after having delivered by us to you a written direction to release the same to the Company.”  

19.  It is important to note that H & C was expressly told that the money was meant for Sky Grand. Obviously, in imposing such a condition, Livasiri saw the risks involved in handing over the money and the importance of safeguarding it against such risks. One of the issues was whether in the circumstances of this case, simply extracting this undertaking was sufficient to protect the plaintiffs’ interest.

20.  The reason for sending the money to H & C is not known. Livasiri had acquired Sky Grand as the joint venture company and compiled the necessary company documentation on behalf of the plaintiffs. Since the money was to be the plaintiffs’ shareholder’s loan to Sky Grand, it is difficult to see why Livasiri could not hold on to the money pending the opening of a bank account for Sky Grand and then pay the money directly to Sky Grand. There was also no apparent reason why the money should be paid to H & C to await the written direction from Livasiri.  The letter was marked “urgent by hand” suggesting that the money was required for use immediately. But if this were so, it was not mentioned in the letter and would be inconsistent with the imposition of the restriction on the release of the money.  However, there was no explanation by anyone from Livasiri as to why this should be done in such a way, since no witness was called on behalf of Livasiri or H & C.

21.  The payment of $5,000,000 to H & C was reported by Livasiri in a letter to the 3^rd plaintiff on the same day, enclosing a copy of the firm’s official receipt for the remittance and a copy of the covering letter to H & C. The letter to the 3^rd plaintiff stated that the money represented the shareholder’s loan to Sky Grand and was sent to H & C to hold “on trust”. The official receipt contained a reference to the sum of $4,999,900 received by Livasiri as “stakeholder money to H & C”. Like the letter of request, there was no explanation in this letter as to why the money should be remitted to H & C. As a result of this letter, the 3^rd plaintiff must have known that its first capital contribution had left the hands of Livasiri. 

Subsequent remittances from the plaintiffs to Livasiri

22.  Livasiri was clearly aware of Mr She’s involvement in the acquisition of the units in Happy Mansion. On 27 June 1997, having asked Mr She about the progress of the Project, Livasiri wrote to the 3^rd plaintiff reporting on the matter. It also requested the remittance of the balance of the plaintiffs’ capital contribution in the sum of $45,000,000. The letter stated the following:

“ … On remittance of your capital, sale and purchase agreements could be signed with all of the owners.

To safeguard your capital and loans at the transfer of the 2^nd payment of your capital, it shall be added as a precondition that the company in cooperation shall have to enter into effective sale and purchase agreements with all of the owners before money is allowed to be released to the sellers, the individual owners, in order to protect your interest.

Please arrange for the 2^nd payment of capital in the sum of HK$45,000,000 for our handling as soon as possible. … ”  

23.  It can be noted that from this letter, the 3^rd plaintiff should be aware that Livasiri would not be holding on to the money which according to Livasiri, was to be used for acquiring the units in Happy Mansion. It is also clear that Livasiri considered it necessary for the protection of the 3^rd plaintiff’s capital to require a pre-condition to be imposed before any money would be released to the owners of the units. 

24.  Pursuant to this second request, between 10 July 1997 and 27 August 1997, seven sums in the total amount of $43,000,000 were remitted by either the 1^st or 3^rd plaintiffs to Livasiri and in turn, on five different occasions between 11 July 1997 and 27 August 1997, Livasiri transferred a total amount of $41,800,000 to H & C.  Each of the transfers was accompanied by a covering letter. These covering letters were similar to the one which accompanied the transfer of the first $5,000,000 to H & C on 18 June 1997.  Again, Livasiri claimed to be acting under the instruction of the 3^rd plaintiff in remitting the money to H & C; it also said that the money was the 3^rd plaintiff’s “shareholder’s loan provided to [Sky Grand]” and the money was sent to H & C subject to the same restriction. By this time, Sky Grand had already been acquired and was ready to operate. There was no apparent reason why, if the ultimate destination of the money was Sky Grand, it needed to go through H & C instead of Livasiri transferring the money directly to Sky Grand.

25.  Out of the $48,000,000 remitted by the plaintiffs to Livasiri (leaving out the bank charges), a sum of $1,200,000 was kept by Livasiri. This sum was later to become the subject matter of the Residue Claim which is now no longer relevant in the present appeals. The total amount thus transferred by Livasiri to H & C was $46,800,000.

The plaintiffs’ knowledge of the transfers to H & C

26.  As the trial judge had found, the 3^rd plaintiff must have known of the transfer of the first $5,000,000 to H & C since 18 June 1997 when it was so informed by letter from Livasiri. This is supported by a letter dated 16 September 1997 which the 3^rd plaintiff wrote on the advice of its accountants to H & C seeking confirmation from H & C that it had received $5,000,000.  If the 3^rd plaintiff did not know about the transfer at that time, it would not have written that letter to H & C. Confirmation came on 30 September 1997 in a letter from H & C issued by one of its partners, the 4^th defendant (“Mr Joseph Chan”).  No query or objection was raised by the plaintiffs with either Livasiri or H & C.  

27.  As to the subsequent transfers to H & C, the 3^rd plaintiff was not expressly told at the time they were made and it was not until 3 October 1997 that Livasiri wrote to the 3^rd plaintiff informing it of these subsequent transfers. But since the 3^rd plaintiff did not raise any query after it had been informed of the first transfer on 18 June 1997, it would not be unreasonable for Livasiri to assume that when the 3^rd plaintiff sent over the further payments of contribution, it (the 3^rd plaintiff) would have no objection to the money being handled in a similar way.  As noted above, from the contents of the second request, the plaintiffs must have known that the money would not be kept in the hands of Livasiri but would be used in connection with the acquisition project. 

The payments made by H & C

28.  On 20 September 1997, Livasiri wrote on the instruction of the 3^rd plaintiff to H & C seeking copies of the duly signed preliminary agreements for the sale and purchase of the units of Happy Mansion.  H & C replied on 23 September 1997 informing Livasiri that its (H & C’s) client would deliver the duly signed preliminary agreements directly to the plaintiffs and that H & C was waiting for the draft formal sale and purchase agreements from the solicitors for the owners and would forward it in due course.  H & C also wrote to Livasiri on 16 October 1997 informing Livasiri that prior to the signing of the formal sale and purchase agreements, Sky Grand was required to raise requisitions on title. Certified copies of the relevant title deeds were also enclosed.  Two points can be made from these letters: first, H & C was clearly acting for the 6^th defendant and not for Sky Grand; secondly, H & C was purporting to act in the conveyancing transactions which were the type of business usually undertaken by a firm of solicitors.

29.  In November 1997, in 16 letters bearing various dates between the 15^th and 18^th, H & C purporting to act for a company called Start Orient Ltd (“Start Orient”) which was said to be the intended purchaser of the units in Happy Mansion, wrote to Messrs Ng Lie Lai & Chan (“NLLC”), solicitors representing 16 of the owners. In each letter, H & C enclosed an engrossment of a formal sale and purchase agreement in respect of the relevant unit and a cheque for the purchase price of that unit.  The cheque was sent against the undertaking of NLLC not to release the cheque to their client until they had received H & C’s written confirmation that all the 25 owners of Happy Mansion had agreed to sell their units to Start Orient. NLLC was asked to send the formal sale and purchase agreements duly signed by these owners upon receipt of such confirmation.  

30.  Most of these letters were not genuine and the payments were never made. This fraud was discovered in the following circumstances.

The fraud revealed

31.  It was in April 1998 after Livasiri had received copies of the formal sale and purchase agreements relating to the acquisition of some of the units in Happy Mansion that Livasiri noticed that the proposed purchaser was Start Orient. In a letter dated 21 April 1998, Livasiri enquired of H & C as to who the purchaser was and its relationship with Sky Grand. It also reminded H & C of the undertaking not to release the money sent over to Sky Grand except with the written direction of Livasiri and sought confirmation as to whether the money it had paid over was still retained by H & C.

32.  In a letter dated 11 May 1998 which purported to be a reply to Livasiri’s letter dated 1 May 1998, H & C said:

“We are instructed that our respective clients have entered into a cancellation agreement cancelling the Shareholders Agreement dated 3^rd July 1997. We are further instructed that our respective clients have agreed and confirmed the repayment schedule in respect of the loan to the above company.

As your client is aware, our client is still committed to acquiring the above redevelopment. We would clarify that Start Orient limited is acting as agent for Sky Grand Development Limited in entering into the Agreement for Sale and Purchase in respect of the above development.”

33.  H & C’s client could only mean the 6^th defendant which was a party to both the Shareholders Agreement and the Cancellation Agreement. H & C also purported to confirm that Start Orient was acting as agent for Sky Grand in entering into the sale and purchase agreements with the unit owners. But apart from this bare assertion, there was no other evidence that Start Orient was in fact acting as agent for Sky Grand.  This was rightly rejected in the courts below.

34.  On 21 May 1998, Livasiri forwarded to the 3^rd plaintiff by fax copies of the 16 letters which purported to have been written by H & C to NLLC representing the unit owners. In June 1998, when Livasiri sought clarification from NLLC, it was revealed that NLLC only got cheques totalling $16,170,000 from H & C relating to 6 owners and that these cheques were never released. NLLC was not holding any other money.

35.  It was subsequently discovered from the ledgers of H & C that between 18 June 1997 (when the first transfer of $5,000,000 was made to H & C) and 7 October 1997, almost all the money sent by Livasiri and paid into H & C’s client’s account although subject to an undertaking not to be released to Sky Grand except with the written direction of Livasiri had been withdrawn by Mr Joseph Chan under various pretexts “as directed by client” without specifying who this client was. Mr Joseph Chan was later arrested for fraud. He was subsequently charged with and pleaded guilty to 10 charges of obtaining pecuniary advantage by deception. It is common ground that the Project was an event leading to one of the fraudulent transactions for which he was charged, although it was not a subject matter of any of the charges laid against him.

The Project fallen through

36.  Since the beginning of the Project, Mr She was heavily involved. From time to time, he was asked to report on the progress of the Project. The picture painted by him was that the Project was making good progress, that all except a few owners had agreed to sell their respective units and that negotiations were conducted with potential purchasers who would be willing to take over the redevelopment.

37.  Then came the financial crisis and share market collapse in around October 1997.  In the latter part of November 1997, the plaintiffs were in need of money and decided to call for the return of part of their capital contribution in the sum of $20,000,000.  Negotiations were conducted between Mr Wang and Mr She as to how the money was to be returned. It is important to note that the plaintiffs approached Mr She and not Livasiri for the return of part of their capital contribution. This indicated that the plaintiffs knew the money was not kept or supposed to be kept by Livasiri. 

38.  By December 1997, the total contributions from the parties were $67,040,000, but not all the units in Happy Mansion could be acquired and five units were said to be still waiting for the release of the deposits by Mr She’s company. The 6 month period for the completion of the Project expired on 3 January 1998.

The Cancellation Agreement

39.  On 21 February 1998, the parties agreed to cancel the joint venture. In March 1998, Livasiri was instructed by the plaintiffs to draft a cancellation agreement.  After approval, it was sent on 11 March 1998 to the 3^rd plaintiff, the 6^th defendant and Sky Grand for execution. By this agreement, the Shareholders Agreement was cancelled; some of the plaintiffs’ rights under that agreement were preserved and the plaintiffs were entitled to demand repayment of their contribution from Sky Grand, and should that fail, from the 6^th defendant.

40.  It was obvious that Sky Grand did not have the means to repay the 3^rd plaintiff and this never happened. So pursuant to the provisions of the Cancellation Agreement, the 3^rd plaintiff instructed Livasiri to seek repayment from the 6^th defendant and Mr She. When that did not result in full repayment, the 3^rd plaintiff turned to the other defendants and H & C, threatening to report the matter to the police if they did not repay.  In the end, the 3^rd plaintiff managed to recover only part of its capital contribution. The outstanding balance is $36,600,000 which is the amount claimed by the plaintiffs against all the defendants in the present action, including Livasiri and H & C. 

Livasiri’s role in the Project

41.  In its Amended Defence, Livasiri admitted that it acted as solicitors for the 3^rd plaintiff in the Project and that Mr Fan on behalf of Livasiri had overall conduct of the Project as solicitors for the 3^rd plaintiff. However, the scope of this retainer and Livasiri’s duties pursuant to this retainer were matters of serious contention in relation to the Negligence Claim. As regards Sky Grand, the judge found that the plaintiffs did not instruct Livasiri to act for Sky Grand.

H & C’s role in the Project

42.  In its Defence, H & C admitted that it was Mr Joseph Chan who acted for the 5^th and 6^th defendants and Start Orient. But all the letters issued by H & C were purportedly written and signed by Mr Joseph Chan on behalf of H & C. The trial judge found that H & C did in fact act for the 5^th and 6^th defendants and Start Orient which was put forward as the vehicle for the purchase of the units in Happy Mansion. He also found that it was the 5^th and 6^th defendants and Start Orient which operated the Project and they were assisted by H & C, although the Cancellation Agreement described H & C rather imprecisely as the lawyer for the acquisition project. On the evidence before him, however, the trial judge was unable to make any finding that H & C had acted for Sky Grand or that the plaintiffs had approved the appointment of H & C as solicitors for Sky Grand.

The claim based on breach of fiduciary duty against Livasiri

43.  The parties and the courts below referred to the plaintiffs’ first claim against Livasiri as the Stakeholder Claim. But this is rather misleading. The plaintiffs’ claim was in essence a claim alleging breach of fiduciary duty on the part of Livasiri in handling their money. The inappropriate description was probably caused by the way the plaintiffs pleaded and presented their case. They alleged that they had declared to Livasiri that their capital contribution was delivered to Livasiri as stakeholder and trustee, and as such, Livasiri had the duty to protect and ensure that the money would be returned to the plaintiffs if the Project could not be completed, but Livasiri had, without obtaining the consent or approval of the plaintiffs, forwarded it to H & C without any security or pledge or any other protection.

44.  At the trial, the main dispute on this claim was whether the money was remitted to Livasiri with an express declaration that Livasiri was to keep the money as stakeholder. Having heard the witnesses called on behalf of the plaintiffs, the trial judge rejected their evidence which he described as “poor and unreliable”. The judge went on to find that the 3^rd plaintiff must have instructed Livasiri to transfer the money to H & C and was not holding the money as stakeholder. Based on this finding, the judge dismissed the Stakeholder Claim. In upholding the judge’s decision, the Court of Appeal simply agreed that there were sound reasons for him to come to that conclusion.

45.  The judge’s finding that the 3^rd plaintiff must have given instructions to Livasiri to hand over the money to H & C was based on a number of grounds. First, the 3^rd plaintiff must have known of the transfers of money to H & C: this was demonstrated by the letter dated 18 June 1997 from Livasiri and the letter dated 16 September 1997 from the 3^rd plaintiff to H & C written on the advice of its accountants. Second, the 3^rd plaintiff must have been aware of H & C’s involvement in the Project: this the judge found upon a review of the correspondence and the Acquisition Formula. Third, the plaintiffs’ evidence was contradicted by their subsequent conduct, in particular the lack of complaint and the failure to take action after knowing that the money was remitted to H & C.

46.  The judge’s finding in this regard is open to question. Although the evidence given by the witnesses for the plaintiffs was not accepted by the trial judge, there was no evidence called on behalf of Livasiri or H & C saying that the 3^rd plaintiff had given such instructions. In fact, that was not Livasiri’s case as pleaded: it merely alleged that it was the parties’ “common understanding and intention” that the money was to be handed over to H & C. The documents reviewed by the judge did not show positively that the 3^rd plaintiff had given instructions to Livasiri to hand over the plaintiffs’ contribution to H & C. Nor can the lack of complaint or inaction or subsequent conduct on the part of the plaintiffs, however consistent with the giving of express instructions, be a sufficient basis for drawing the inference that Livasiri must have been acting under the plaintiffs’ instructions when it passed over the money to H & C. In our view, the judge’s finding cannot stand.

47.  But that does not mean the plaintiffs can succeed in their claim for breach of fiduciary duty against Livasiri for failing to handle their money properly.  On the evidence, it is quite clear that the 3^rd plaintiff knew from an early stage that the money which it had remitted to Livasiri was not held and was not intended to be held by Livasiri as a stakeholder.

48.  The 3^rd plaintiff was informed shortly after the first payment of contribution that the money was transferred by Livasiri to H & C. Not only did the 3^rd plaintiff raise no objection to this transfer, when the second request was made, the plaintiffs promptly responded with a remittance and this was followed by further remittances. That request gave no indication that the further contribution of $45,000,000 would be handled by Livasiri any differently from what it had done with the first contribution. The 3^rd plaintiff’s subsequent conduct was also significant. In December 1997 when the success of the Project was very much in doubt and the 3^rd plaintiff was asking for the return of part of its capital contribution ($20,000,000), it did not express any concern as to why the money was not in the hands of Livasiri. Instead, it turned to Mr She for repayment. It even instructed Livasiri to draft a cancellation agreement which contained the provision that the 3^rd plaintiff was to go after the 6^th defendant. Livasiri was also instructed to act for the 3^rd plaintiff in the recovery process. In June 1998, the 3^rd plaintiff wrote to H & C asking for repayment of the money threatening to report the matter to the police if H & C did not do so. In these circumstances, the 3^rd plaintiff can hardly complain that Livasiri was in breach of fiduciary duty in handing over the 3^rd plaintiff’s money to H & C or had acted contrary to its duty as a stakeholder. Livasiri was simply not a stakeholder of the 3^rd plaintiff’s money.

49.  On these facts, it can also be said that the 3^rd plaintiff’s knowledge, its lack of objection and its subsequent conduct gave rise to an inference that it had implicitly authorized the transfers of its money by Livasiri to H & C. We would add however that this does not mean in the context of the Negligence Claim that such implicit authorization was informed authorization since, as we shall develop later, there is no evidence that the 3^rd plaintiff had been advised by Livasiri on the risks which would be involved in having the money handed over to H & C.

50.  In our view, the plaintiffs’ claim based on breach of fiduciary duty as pleaded and presented in the courts below was rightly rejected by the trial judge as upheld by the Court of Appeal. Whether Livasiri should be held liable for negligence for failing to give adequate advice to the 3^rd plaintiff and to take sufficient steps to protect its interest is a separate matter which will be dealt with under the Negligence Claim.

51.  Before this Court, Mr Michael Thomas SC (who did not appear in the courts below) advances an argument which is different from what the plaintiffs had submitted in the courts below. It is based on resulting trust: the money was given to Livasiri for a specific purpose (that is, to be paid to Sky Grand as the plaintiffs’ share of the shareholder’s loans in connection with the acquisition project) but was not applied for that purpose (the money having been fraudulently misappropriated by Mr Joseph Chan). There was a breach of trust on the part of Livasiri (and H & C) and they should be jointly liable for money had and received or as trustees.

52.  This argument is as simple as it is attractive. However, we do not think this argument is now open to the plaintiffs. At the trial, in response to the plaintiffs’ claim as pleaded and presented, Livasiri chose to make a submission of no case to answer and called no witness. The submission of no case was upheld by the trial judge. We are not satisfied that if this claim had been presented before the trial judge in the way as it is before this Court, the evidence adduced before the judge would not have been materially more favourable to Livasiri. (See Flywin Co Ltd v Strong & Associates Ltd (2002) 5 HKCFAR 356.) In any event, in view of our decision on the Negligence Claim, it is not necessary to deal with the merits of this argument and we do not propose to express any opinion on it.

The Negligence Claim

53.  In giving judgment for the plaintiffs on the Negligence Claim, the trial judge found that the risks that the plaintiffs’ capital contribution which was received by H & C might not be utilized in accordance with the plaintiffs’ instructions or in their interest were reasonably foreseeable and that Livasiri was aware of such risks. He held that in these circumstances, imposing the undertaking as it did when passing the money to H & C was not sufficient security to protect the plaintiffs’ investment and that Livasiri was under a duty to take possible steps to guard against such risks, including advising the plaintiffs properly on the risks and taking other possible options to avoid such risks without frustrating the business objectives of the plaintiffs. As an option to avoid the risks, the judge mentioned the opening of a bank account for Sky Grand so that the money could be deposited in the account and under the control of the 3^rd plaintiff through Sky Grand. The judge was also satisfied that if Livasiri had given adequate advice to the plaintiffs, the 3^rd plaintiff would not have authorized the sending of the money to H & C in the way they did.

54.  However, the Court of Appeal reversed the judge’s decision. In doing so, the Court’s reasons were rather terse. After referring to the arguments of counsel for Livasiri (in paragraphs 47 and 48 of his judgment), it continued in paragraphs 49 and 50:

“49.    In this case it is clear that the third defendant was acting on the instruction of the fifth and sixth defendants and those companies were in control of the Happy Valley project. It was clear that the capital contribution in the way of loans provided by the plaintiffs was to be used for the purchase of the Happy Valley properties and for no other purpose. Whether or not monies went into an account in the name of the seventh defendant was immaterial. It would have had to have been transferred to the third defendant for the purpose of making the purchases. The judge was entirely justified in deriving comfort, as he did, as to the conclusion that the plaintiffs had intended the monies to be transferred to the third defendant by relying upon the Acquisition Formula.

50.  In view of the fact that the purchases of the various flats and the need for the purchase monies to be available seemed to be imminent and that the transfer of the shares in the seventh defendant and the formal appointment of the directors did not take place until early July 1997 the suggestion by the judge that a bank account should have been opened in the name of the seventh defendant and that was the only reasonable way of the plaintiffs proceeding was not a valid criticism of the first defendant. The opening of an extra bank account would, in my view, have been an unnecessary step and would not have achieved anything.

51. In those circumstances I would allow the first defendant’s appeal against the finding of negligence … ”

55.  It would seem that the Court of Appeal considered that the 3^rd plaintiff had accepted the risks by giving instructions to have its money transferred to H & C. The Court also took the view that since the money would end up going to pay the unit owners, the trial judge’s suggestion of opening a bank account for Sky Grand where the plaintiffs’ capital contribution could be placed and controlled was neither necessary nor useful.

56.  In supporting the trial judge’s decision, Mr Thomas submits that since Livasiri was the solicitors for the plaintiffs in the Project, it was Livasiri’s duty to advise the plaintiffs generally on the investment and to protect their interest. Livasiri was in breach of such duty in that it had failed to do anything to ensure that Sky Grand was used to protect the plaintiffs’ interest as anticipated in the Shareholders Agreement and had failed to appreciate or to advise the 3^rd plaintiff of the risks in parting with the money without sufficient security. Mr Clifford Smith SC for Livasiri argues that this is a new point which is not open to the plaintiffs in this appeal. We do not agree. It was clearly one of the allegations of negligence made in the Amended Statement of Claim and was dealt with by the trial judge in his judgment.

57.  The main disputes between the parties are: what was Livasiri retained to do for the plaintiffs; what were its duties; and did it fail to discharge such duties.

58.  Livasiri admitted in its Defence that it was the solicitors acting for the 3^rd plaintiff in the Project and that Mr Fan had, on its behalf, the overall conduct of the Project. It was not retained to advise the plaintiffs on the commercial feasibility or profitability of the Project; that was a matter for the 3^rd plaintiff. It was retained to advise the plaintiffs on the legal aspects of the Project and the proper and necessary steps to be taken to implement the Project. This retainer gave rise to “a complex of rights and duties of which the duty to exercise reasonable care and skill is but one” (Midland Bank v Hett, Stubbs & Kemp [1979] 1 Ch 384, per Oliver J at 434).  In Groom v Crocker [1939] 1 KB 194, at 222, Scott LJ put it in more concrete terms:

“The retainer when given puts into operation the normal terms of the contractual relationship, including in particular the duty of the solicitor to protect the client’s interest and carry out his instructions in the matters in which the retainer relates, by all proper means. It is an incident of that duty that the solicitor should consult with his client in all questions of doubt which do not fall within the express or implied discretion left him, and should keep the client informed to such an extent as may be reasonably necessary according to the same criteria.” 

59.  Livasiri’s principal duty was thus to protect the plaintiffs’ interest and this entailed ensuring that the plaintiffs’ capital investment would be protected against foreseeable but avoidable risks involved in the Project. This included the giving of adequate advice on the risks involved and the taking of appropriate steps to avoid such risks. As Lord Brightman said in Edward Wong Finance Co Ltd v Johnson Stokes & Master [1984] 1 AC 296, at p.307G:

“… it is the solicitor and not the client who has the better opportunity to assess the gravity or remoteness of the risk involved in a particular case, and it is the solicitor and not the client who has the necessary expertise to analyse and guard against the risk.”

Bingham LJ also said in County Personnel Ltd v Pulver & Co [1987] 1 All E R 289, at 295b:

“The client is entitled to expect the exercise of a reasonable professional judgment. That is why the client seeks advice from the professional man in the first place. If in the exercise of a reasonable professional judgment, a solicitor is or should be alerted to risks which might elude even an intelligent layman, then plainly it is his duty to advise the client of these risks or explore the matter further.”

60.  Livasiri was aware that the 3^rd plaintiff was to invest a large sum of money in the Project; that the 3^rd plaintiff’s contribution was the major share of the investment (70%) and yet the other joint venture partner (investing the remaining 30%) was to be in charge of the negotiations with the unit owners; and that the objective of the Project was to acquire all the units of Happy Mansion and if this could not be accomplished within six months, all the investments had to be refunded in full to the partners of the joint venture. Thus it advised the 3^rd plaintiff to proceed with the joint venture with the companies represented by Mr She by way of a shareholders agreement and through the use of Sky Grand. The Shareholders Agreement (which was drafted by Livasiri) provided the 3^rd plaintiff with a framework to protect its investment by having a majority control over Sky Grand through the board of directors and the operation of its bank account.

61.  But Livasiri’s duties did not end there. As solicitors for the 3^rd plaintiff in the Project, Livasiri’s retainer also included a duty to see to it that the protective measures which it had devised for the 3^rd plaintiff were carried through and the provisions of the Shareholders Agreement implemented and to ensure that the plaintiffs’ capital contribution was protected in that it was either properly applied for the purpose of the acquisition of Happy Mansion or refunded in full if the Project should fail.

62.  In handling the money remitted by the plaintiffs, Livasiri was aware that the capital contribution was to be a shareholder’s loan to Sky Grand; that Sky Grand was to enter into sale and purchase agreements with the unit owners in Happy Mansion; that there was however no board resolution by Sky Grand for raising loans from its shareholders, for acquiring property or for appointing any solicitors; that H & C was the solicitors for the 6^th defendant which was the other joint venture partner; and that there would be a period of time before the money could be applied or returned. There was no reason to believe that H & C was the solicitors for Sky Grand. Nor was there any basis for drawing the inference, as the Court of Appeal did, that Start Orient acted as agent for Sky Grand.

63.  In these circumstances, as the trial judge had rightly found, the risks that the money after it was put into the hands of H & C might not be applied for the purpose of the Project were reasonably foreseeable. Livasiri should have warned the 3^rd plaintiff of such risks and advised it on the necessary steps which might be taken to avoid such risks. Mr Clifford Smith argues that in handling the money, Livasiri was merely acting as a conduit in handing over the money to H & C. This defies common sense and ignores the reality of the circumstances.

64.  Had Livasiri discharged its duties? In our view, it failed in two aspects. First, there was no evidence Livasiri had given any advice to the 3^rd plaintiff as to the risks involved in handing over the money to H & C. The correspondence showed that the 3^rd plaintiff was not even made aware of such risks. The fact that the 3^rd plaintiff might be taken to have implicitly authorized the transfers of money to H & C does not absolve Livasiri from its duty to advise the 3^rd plaintiff on the risks involved before the transfers. Such implicit authorization was clearly not informed authorization in the absence of any advice from Livasiri as to what were the risks involved. It was wrong to say, as the Court of Appeal seemed to have said, that the 3^rd plaintiff must be taken to have assumed the risks when the 3^rd plaintiff was not even aware of the risks and the consequences.

65.  Secondly, Livasiri had done nothing to protect the 3^rd plaintiff’s investment. It did not take any step to invoke the protective measures which on its advice were included in the Shareholders Agreement, such as making use of Sky Grand as the vehicle for acquiring the various units. It begs the question to ask what precautions could have been taken in the present case when the very protective measures devised by Livasiri itself were not even considered and employed. They were there specifically for such purpose. Reference was made to Edward Wong Finance Co Ltd v Johnson Stokes & Master [1984] 1 AC 296. Although it was a case involving a conveyancing transaction (which is not the case here), it was never doubted in that case that the solicitors representing a client in a property transaction had the duty to protect their client against reasonably foreseeable risks. There, the Privy Council held that where there was a reasonably foreseeable risk in passing money to the solicitors for the other party in the transaction, the solicitors would be negligent not to take precautionary steps to avoid such risk and that it was not sufficient to protect client’s interest in the circumstances of that case by merely following the general practice. In the circumstances of the present case, extracting an undertaking from H & C was clearly not sufficient to protect the plaintiffs’ interest.

66.  Counsel for Livasiri argues that there is nothing to support the trial judge’s conclusion that the plaintiffs had succeeded in showing that they would not have sent the money to H & C if Livasiri had given the adequate advice to the 3^rd plaintiff of the risks involved. This has missed the point. The protective framework was introduced to guard against these risks, but was never put into use. If Livasiri had ensured that the protective machinery in the Shareholders Agreement was put into effective operation, the kind of manipulation by Mr She and Mr Joseph Chan which led ultimately to the embezzlement would not have succeeded.    

67.  In our view, on the evidence, there is a clear case of negligence on the part of Livasiri as solicitors acting for the 3^rd plaintiff.  For these reasons, we would allow the appeal on the Negligence Claim.

H & C’s appeal - the pleading issue & the undertaking issue

68.  The case against H & C is that it had received the plaintiffs’ money from Livasiri for a specific purpose and subject to an undertaking not to release it except with the written direction of Livasiri. However, one of its partners, Mr Joseph Chan had, contrary to such specific purpose and in breach of such undertaking, fraudulently misappropriated the money. The firm should thus be held vicariously liable for such loss.

69.  H & C’s appeal is pursued in the context of three issues raised from their grounds of appeal. The first issue is a pleading point (which was rejected by the courts below). It is said that since the plaintiffs’ pleaded case was that they had not authorized Livasiri to transfer the money to H & C, the trial judge, having rejected this allegation, was wrong to hold H & C liable to the plaintiffs on the basis that the plaintiffs had so authorized Livasiri, a basis which was inconsistent with the pleaded case and their own evidence. The second issue, a separate but related issue, is that since the plaintiffs had denied having authorized the transfer of money to H & C, the undertaking imposed by Livasiri could not have been imposed with the plaintiffs’ knowledge and authorization; and that the judge should not have held H & C liable on the undertaking. The third issue is that the firm, H & C should not be vicariously liable for the Mr Joseph Chan’s own fraud.

70.  The first two issues can be disposed of very briefly. On the pleadings, that the 3^rd plaintiff had authorized the transfer is apparent from the totality of the plaintiffs’ pleading (see paragraph 41 of the Amended Statement of Claim), notwithstanding the striking out of that part of the defence of H & C which would more obviously have served that purpose. On the facts, it is clear that H & C knew the money came from the plaintiffs and the purpose for which it was sent over. They accepted the money subject to the undertaking imposed by Livasiri. As the plaintiffs’ solicitors, Livasiri was under a duty to protect the plaintiffs’ interest and must be taken to have the implied authority to impose the undertaking on H & C.  In any event, as discussed above, the plaintiffs must be taken to have implicitly authorized the transfer of the money from Livasiri to H & C.  There is plainly no merit in these two points.

Vicarious liability of H & C

71.  On the vicarious liability issue, in the courts below, reliance was placed only on s.12 of the Partnership Ordinance, Cap 38 and the main arguments were focused on whether Mr Joseph Chan’s acts were acts in the ordinary course of business of the firm and hence binding on H & C. However, s.13(b) of the Ordinance is obviously more relevant in the circumstances of this case.

72.  The provisions of ss.12 and 13 of the Ordinance are as follows:

“12. Where, by any wrongful act or omission of any partner acting in the ordinary course of the business of the firm or with the authority of his co-partners, loss or injury is caused to any person not being a partner in the firm, or any penalty is incurred, the firm is liable therefor to the same extent as the partner so acting or omitting to act. 

13. In the following cases, namely –

 (a)… ; and

 (b) where a firm in the course of its business receives the money or property of a third person, and the money or property so received is misapplied by one or more of the partners while it is in the custody of the firm,

the firm is liable to make good the loss.”

73.  Whereas s.12 applies generally to cases where a partnership is sued for a partner’s wrongful act or omission while acting in the ordinary course of the business of the partnership, s.13(b) covers the specific situation of a claim against the partnership where money or property received by the partnership in the course of its business was misapplied by a partner. In certain instances, a s.13(b) situation may also fall within s.12 such as in the case where the money or property received by the firm in the course of its business and misapplied by one of its partners (which triggers s.13(b)) is misappropriated by a wrongful act of that partner in the ordinary course of the firm’s business (which triggers s.12). In the case of s.12, it is necessary to prove that the wrongful act or omission is committed in the ordinary course of the firm’s business. In a s.13 case, it is sufficient to show that the money or property is received by the firm in the course of its business and is misapplied while it is in the custody of the firm. One can immediately see that the facts of the present case make this a typical “receipt” case for the application of s.13(b). This was raised by the Court with counsel at the hearing and they were invited to make submissions on this section.

74.  There can be no doubt that a total sum of $46,800,000 which belonged to the plaintiffs was sent by Livasiri to H & C for a specific purpose and subject to the undertaking that the money would not be released without the written direction of Livasiri.  It is accepted that the money was received by H & C subject to this undertaking and was paid into the firm’s client’s account. The money was subsequently paid out of that account and dissipated by Mr Joseph Chan in breach of the undertaking and not for the purpose for which the money was paid into that account.  All these transactions were recorded in the firm’s ledgers. There is no basis for the argument that the money was not received in the course of the firm’s business or that it was not misapplied while it was in the firm’s custody.  On such facts, there can, in our view, be no defence to a claim by the plaintiffs against the firm for the loss of the money under s.13(b).  None was offered to the Court. 

75.  It is thus difficult to understand why the parties and the trial judge found it more appropriate to rely on s.12. On the facts of the present case, once it is accepted, as Mr Neville Sarony SC leading Ms Angel Lau for H & C fairly accepts, that the money was received into H & C’s client’s account in the course of business of the firm from which it was disbursed and there were entries in the firm’s ledger to this effect, s.13(b) is triggered. That is the end of the case for H & C and judgment in favour of the plaintiffs must necessarily follow. As Mr Thomas submits, and Mr Sarony does not seriously contend otherwise, if the plaintiffs succeed on s.13(b), it is no longer necessary in the present case to deal with s.12. In view of our conclusion on s.13(b), we do not propose to express any view on the submissions based on s.12. We hope this would not be taken as showing any disrespect to counsel on both sides.

76.  We would however mention that towards the end of Mr Sarony’s submissions, Mr Bobby Ho of the 3^rd defendant withdrew his instructions and proceeded to represent himself. Much as he tried to exonerate himself from what his partner, Mr Joseph Chan had done, he was unable to advance his case any further than what had been said on his behalf.

Compound interest

77.  The last point which is raised by the plaintiffs is the question of interest. Mr Russell Coleman SC submits that if the plaintiffs were to succeed in this appeal on the breach of fiduciary duty claim, he would be seeking compound interest on the judgment sum. As this Court has upheld the dismissal of that claim, it is not necessary to consider the relevant principles on the award of compound interest or the applicability of those principles to this case. In any event, whether this submission applies to a claim based on breach of fiduciary duty, this was neither pleaded nor argued in the courts below. No evidence was adduced on this issue. We do not think it is appropriate to deal with it and we would decline the invitation to do so in this appeal.

Results

78.  In respect of these appeals, we would make the following orders:

(1)  the plaintiffs’ appeal be allowed and the judgment given by the trial judge in their favour against Livasiri be restored; and

(2)  the appeal by H & C be dismissed.

79.  As indicated at the hearing, the question of costs before this Court and in the courts below will be dealt with by written submissions as directed by the Registrar.

Mr Justice Ribeiro PJ:

80.  I agree with the joint judgment of Mr Justice Chan PJ and Mr Justice Nazareth NPJ and the judgment of Sir Gerard Brennan NPJ.

Sir Gerard Brennan NPJ:

81.  The circumstances giving rise to this litigation are set out in the joint judgment of Mr Justice Chan PJ and Mr Justice Nazareth NPJ and I gratefully accept their account.  The evidence relevant to the issues for determination is to be found chiefly in the documentary material, since, as their Lordships point out, no evidence was called by any of the defendants and the oral evidence tendered by the plaintiffs was described by the learned trial judge as “poor and unreliable”.

82.  The first document of significance passing between Livasiri & Co. (“Livasiri”), the 1^st defendant, and the plaintiffs or one of them is the shareholders’ agreement drafted by Livasiri, signed on 16 June 1997 but not dated until 3 July 1997.  By that agreement, a shelf company, Sky Grand Development Limited (“Sky Grand”), the 7^th defendant, was to be acquired, control was to be vested in a board with a majority of the directors appointed by the plaintiffs and the company was to open a bank account.  Operations on the bank account were to be authorized by the signatures of nominees of the plaintiffs and of Primrose Wood International Limited (“Primrose Wood”), the 6^th defendant.  The plaintiff shareholders’ loancontributions were thus to be provided with a secure repository pending the outcome of negotiations with the unit holders in the Happy Mansion’s complex.

83.  The next document is the 1^st defendant’s letter of 18 June 1997 acknowledging receipt of $4,999,900, enclosing an official receipt and a copy of the letter sent that day to the 3^rd defendant and advising that –

“We have issued cheque of HK$5,000,000.00 payable to Messrs. Ho & Chan, Solicitors today as the shareholders’ loan you paid to Sky Grand Development Limited for the caption matter, and at the same time requested the said law firm to hold the amount of HK$5,000,000.00 on trust and the payment make to the joint venture company be subject to our written instruction.  We enclose the relevant correspondence for your file.”

The letter to the 3^rd defendant which was copied to the plaintiffs read:

“We act for [the 3^rd plaintiff] and are instructed to send our cheque in your favour for the sum of HK$5,000,000 being our client’s shareholder loan to [the 7^th defendant Sky Grand] in respect of the acquisition of the properties at [Happy Mansion].

The cheque is sent to you subject to your firm’s personal undertaking to hold the said sum of money as stakeholders on condition that the said sum of money shall only be released to [Sky Grand] after having delivered by us to you a written direction to release the same to [Sky Grand].”

84.  The plaintiffs raised no question about this arrangement, despite the apparent change from those provided for in the shareholders’ agreement.  There can be no doubt but that the plaintiffs knew what had happened to the first payment of funds which they had provided to Livasiri.  This knowledge was clearly the basis for the September letter drafted by the accountants and signed by Mr Wang seeking confirmation from the 3^rd defendant that it was holding “the amount deposited with you [of] HK$4,999,900 which would be released to Sky Grand Development Limited in accordance to a written direction from Overseas Way (China) Limited.”  (“Overseas”, the 3^rd plaintiff)  The shareholders’ first contributions were not to be held by Sky Grand pending the payment of deposits to vendors of the Happy Mansion’s units pursuant to contracts of purchase and sale.  Instead, they were to be held by the solicitors for Mr She’s companies, albeit the funds were intended as the first instalment of the plaintiffs’ shareholder loan to Sky Grand.

85.  On 27 June, Livasiri again wrote (in Chinese) to Overseas, asking it to arrange the payment to Livasiri of the balance of the loan contribution of $45 million.  The letter added:

“ In addition, we have enquired of Mr. She Jin Tong about the progress of the join project.  According to the introduction given by Mr. She, Mr. She has held owners’ meetings with the owners involved in the Happy Valley project, and has got all the owners’ consent to sell their flats.  On remittance of your capital, sale and purchase agreements could be signed with all of the owners.  To safeguard your capital and loans at the transfer of the 2^nd payment of your capital, it shall be added as a precondition the company in cooperation [that is, Sky Grand] shall have to enter into effective sale and purchase agreements with all of the owners before money is allowed to be released to the sellers, the individual owners, in order to protect your interest.

 Please arrange for the 2^nd payment of capital in the sum of HK$45,000,000 for our handling as soon as possible.”

86.  This letter plainly shows that the money to be paid to Livasiri “for our handling” was not to be held by Livasiri.  Livasiri was to add a precondition to the release of money to the sellers, and the precondition was to be added “at the transfer of the 2^nd payment of your capital”.  The only transfer which had earlier occurred was the transfer to Ho and Chan, the 3^rd defendant.  The only condition which had earlier been imposed and to which the precondition might be added was the condition imposed on Ho and Chan, requiring Livasiri’s written direction to release funds to Sky Grand.  With the correspondence and events surrounding the first payment as the background, this letter was a clear statement that the second payment was to be transferred to Ho and Chan in the same manner as the first payment but with an added condition.  It is immaterial that Livasiri failed to impose the added condition; what is material is that the plaintiffs were notified that their second contribution was to be transferred to Ho and Chan.

87.  No explanation has been given for entrusting Ho and Chan with the plaintiffs’ funds.  It may be that, as Mr She had the carriage of the negotiations with the Happy Mansion’s unit holders, it would be convenient for his companies’ solicitors to have control of the shareholders’ loan funds in anticipation of the securing of purchase and sale contracts.  In the events that followed, Mr She and Ho and Chan were treated as the persons responsible not only for carrying out the negotiations but for dealing with the plaintiffs’ funds.

88.  Thus Mr Wang applied to Mr She for a return of $20 million of the plaintiffs’ funds in November 1997 and Mr She responded by letter on 18 December 1997 apologizing for his failure to raise money to provide a refund to the plaintiffs.  When the project collapsed, the plaintiffs did not apply to Livasiri for the return of their contributions but entered into a cancellation agreement containing a curious provision about all parties using their best endeavours to procure the return from a third party.  In that document, Ho and Chan were described as the firm representing the project.  That meaningless description perhaps itself represents an idea that Ho and Chan were to obtain the contracts of sale and purchase, pay the deposits and complete the acquisition of the Happy Mansion units in the name of Sky Grand, even though the board of Sky Grand had not resolved to accept shareholder loans, to acquire the Happy Mansion units or to engage the services of Ho and Chan.

89.  It is impossible to accept the plaintiffs’ allegation that Livasiri transferred the funds to Ho and Chan without the plaintiffs’ knowledge and at least implicit authority.  That allegation surfaced only in September 1998 and, as the trial judge observed, it is incredible that the plaintiffs would have wanted Livasiri to act for them to recover the funds if it was Livasiri’s unauthorized transfer of the funds which they knew to be the cause of their loss.

90.  When Mr Wang wrote to Ho and Chan on 10 June 1998, he noted that Ho and Chan had promised to repay the money to the plaintiffs on 13 June 1998 and informed them that the plaintiffs had instructed “Livasiri & Co. to act for us”.  The letter included the following:

“… Our suspicion has been aroused as to the goodwill of your firm.  Hence, we have already instructed Messrs. Livasiri & Co. to act for us.  We instructed Messrs. Livasiri & Co. to send a letter to your firm and demanded your firm to issue a valid and irrevocable instruction to the law firm which acts for the ‘25 property owners in Happy Valley’.  We also requested that you deposit our amount of investments and the interests directly into the accounts of Messrs. Livasiri & Co. after terminating the agreements.…”

(This was a reference to terminating the supposed agreements with the Happy Mansion vendors).  Mr Wang also informed Ho and Chan of the plaintiffs’ intentions:

“… If we do not receive a valid letter (arrangement) of guarantee from your firm by noon on 12 June 1998, we will instruct Messrs. Livasiri & Co. in the afternoon to issue a letter to your firm and request all your solicitors and partners to clarify this matter.  If we do not receive all our investments and interests in respect of the ‘Happy Valley Project’ from your firm by 1:00pm on 13 June 1998, we will report the matter to the police in good time.…”

91.  These facts are ample to establish that the plaintiffs, with knowledge of the actual and proposed transfers of their shareholder loans to Ho and Chan, had permitted, and thereby consented to, at least implicitly, those transfers.  But the evidence is not sufficient, in my view, to show that the plaintiffs had instructedLivasiri to make the transfers to Ho and Chan.  Whatever the form of authority given to Livasiri to transfer the funds to Ho and Chan, the plaintiffs’ “stakeholder claim” (as the pleadings described it) must fail.

92.  The plaintiffs’ loss of the substantial portion of their shareholder loans was caused by the dissipation of those funds after transfer to Ho and Chan.  It seems that Mr Chan Kwok Yim, the 4^th defendant and a partner in Ho and Chan, misappropriated the funds.  Was the risk of such a defalcation a risk against which Livasiri had a duty to protect the plaintiffs?

93.  The plaintiffs had retained Livasiri to act for them in the joint venture of acquiring and developing the Happy Mansion’s complex.  The joint venture required some arrangements to be made for the retention of the shareholders’ loan to be advanced by the plaintiffs until it was either applied to pay the deposits on contracts for the purchase of the Happy Mansion units or returned to the plaintiffs if enforceable contracts with all unit holders were not concluded within 6 months.  It was Livasiri’s duty to identify any risks involved in the arrangements forkeeping the plaintiffs’ loans pending their application in accordance with the shareholders’ agreement, to advise the plaintiffs about such risks and, in default of any contrary instructions, to take the steps needed to avoid those risks.

94.  When a client entrusts a solicitor with funds intended to be applied in discharge of an obligation in a transaction in which the solicitor is retained, the solicitor is negligent if the funds are paid to a party whose receipt does not discharge the obligation unless the client, being adequately advised of the risk that the obligation may not be discharged, has directed that the payment be made.  The onus of proving adequate advice and direction rests on the solicitor.  It is not necessary to consider whether, in an exceptional case, the risk may be reasonably incurred without prior authorization if the payment is necessary to avoid the loss of the transaction.  In the present case, Livasiri offered no proof that any advice was given to the plaintiffs about the risks of defalcation by Ho and Chan, nor any proof of a direction to pay the money to Ho and Chan.  There was no possibility that the transaction might go off if proper arrangements had been made for the keeping of the loan moneys pending their application in accordance with the shareholders’ agreement.

95.  There were a number of ways in which the plaintiffs’ funds might have been secured.  They could have been retained by the plaintiffs until they were required either to be deposited in Sky Grand’s bank account or to be paid to the vendors of the Happy Mansion’s units.  They could have been retained by Livasiri in the same way.  Or they could have been deposited forthwith in Sky Grand’s bank account if Sky Grand had opened an account.  None of these ways was adopted.  Instead, the moneys were disbursed to Ho and Chan who, as Livasiri knew, had not been appointed by Sky Grand as its agent to receive the shareholder loans.  Indeed, the condition on which Livasiri paid the moneys to Ho and Chan prohibited the payment of the moneys to Sky Grand without further written permission.  Ho and Chan had no authority in the joint venture save the authority (if any) conferred on them by Mr She’s companies.

96.  The risk of defalcation by Ho and Chan may not have been foreseen but the risk was foreseeable and it was Livasiri’s duty as the plaintiffs’ solicitors to assess the risk: Edward Wong Finance Co. Ltd v. Johnson Stokes & Master (a firm) [1984] 1 AC 296, 307G.  In Edward Wong, the defendant firm was held liable for paying the money needed to discharge a mortgage on a property to the solicitor for the vendor, who defaulted on an undertaking that the mortgage debt would be paid.  The solicitor did not have the mortgagee’s authority to receive money on the mortgagee’s behalf.  In the present case, Ho and Chan had no authority to receive money on behalf of Sky Grand.  If Livasiri wished to shed its own responsibility to the plaintiffs to safeguard their funds, they could not do so by transferring those funds to solicitors who had no client relationship with either the payer or the intended ultimate receiver of the funds.

97.  It was Livasiri’s duty, whether by advice or - more obviously – by carrying through the process contemplated by the shareholders’ agreement, to ensure that the funds were not at risk of loss by the defalcation of Ho and Chan.  Having regard to the plaintiffs’ aversion to risk, as evidenced by their internal memoranda, it is clear that they would have followed any advice given by Livasiri to safeguard their funds.

98.  Livasiri is thus liable in negligence to make good the loss of funds suffered by the plaintiffs.  The measure of this loss is the difference between the sums received by Livasiri as the plaintiffs’ shareholder loans and the amounts recovered to date or to be recovered from defendants other than Livasiri.  Any interest sorecovered by the plaintiffs is not to be included in the calculation.

Liability of Ho and Chan

99.  This firm received moneys belonging to the plaintiffs.  While in their custody, these funds were misapplied.  The firm is liable: Partnership Ordinance, Cap. 38, s.13(b).

100.  I agree with the Order proposed by Mr Justice Chan PJ and Mr Justice Nazareth NPJ.

Mr Justice Bokhary PJ:

101.  The plaintiffs’ appeal is allowed, the trial judge’s judgment against Livasiri in favour of the plaintiffs is restored, H & C’s appeal is dismissed, and the question of costs here and below will be dealt with on written submissions as to which the parties should seek the procedural directions from the Registrar.