CHRISTINE RUTH ONG CHAI HOON AND OTHERS v. LAM KIN CHUNG AND OTHERS

HCA 1793/2012

[2020] HKCFI 2768

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1793 OF 2012

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REASONS FOR DECISION
AND
DECISION ON COSTS

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1.  On 14 August 2019, Master Kot gave leave to the parties to adduce expert evidence from a single joint expert (“SJE”) on the methodologies adopted in the valuation report prepared by Full Star Consultants Limited (“Full Star”) dated 19 October 2006 (“the Full Star Report”) and valuation of 15 car park spaces pleaded by the parties in their respective pleadings.

2.  The Full Star Report was signed by the 2^nd defendant (“D2”), who was a director of Full Star and a certified public accountant on the date of the report.

3.  By a summons dated 22 January 2020 (“the summons”), the 1^st defendant (“D1”) and the 4^th defendant (“D4”) sought a direction that Ps, D1, D2 and D4 should attempt to agree on the identity of the SJE from the discipline of business valuation to give the expert opinion as stated in Master Kot’s order dated 14 August 2019.  The application was supported by D2 but opposed by the plaintiffs (“Ps”).

4.  After hearing submissions, I dismissed the summons and reserved my decision on costs.  These are my reasons for dismissing the summons and my decision on costs of the summons.

Car park business not a pleaded issue

5.  I dismiss D1 and D4’s application, for “car park business” now raised by D1 and D4 is not a pleaded issue.

6.  It is trite that the issues in a trial are defined by pleadings, not by evidence.  As said by Ma CJ in Kwok Chin Wing v 21 Holdings Ltd^[1]:-

“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 Limited v Crystal Jet International Limited [2005] 2 HKLRD 795, 799 [6(1)]. 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. As the Court of Appeal remarked in Wing Hang Bank Limited v Crystal Jet International Limited:-

‘(2) In a trial, particularly where evidence is given by witnesses, it becomes extremely important that each side knows exactly what are the live issues. Where issues are sought to be introduced that have not been adequately or properly pleaded, amendments must be sought unless the consent of the other party or parties has been obtained. It will simply not do for unpleaded issues to be “slipped in” when evidence is being given in the hope that the other side is not sufficiently alert to object.’

22. …… one does not sift through the evidence adduced in a trial in the hope that something was said that can conceivably found a cause of action. Issues, I would reiterate, must be properly pleaded unless for some reason the pleadings have assumed a less significant role in the proceedings.” (Emphasis added)

7.  Ps’ claim against all the defendants (“Ds”) is based upon an alleged fraudulent scheme carried out by Ds from June 2006 to October 2011.  According to Ps:

(1)     D4 is in reality a company which never had any significant business, sales, revenue, or income at any point in time, ie the “No Revenue Reality”, which was unknown to Ps since Ps were induced to believe that D4 was hugely profitable and valuable by reason of the Fraudulent Misrepresentations made by D1, D2, and the 3^rd defendant (“D3”).  Particulars of the Fraudulent Misrepresentations are pleaded in [8] of the Re-Amended Statement of Claim.

(2)     By the Fraudulent Misrepresentations, Ds induced Ps to make numerous payments totalling about HK$24 million, as pre-IPO investments in D4.

(3)     The Fraudulent Misrepresentations painted a blatantly false and dishonest picture of D4’s business and financial status.

(4)     One of the Fraudulent Misrepresentations is the Car Park Security Misrepresentation.

(5)     For the purpose of determining the summons, the following pleas in the Re-Amended Statement of Claim are relevant:

(a)    “At the same time, Strong Man[2] would also be a party to each of the Loan Agreements[3], as a guarantor putting up certain car park properties in Hong Kong, namely 20 car park spaces ... (“the Car Park Properties”), as additional security fully securing the loan of investment monies (“the Car Park Security”).”[4]

(b)    “Each investment would be secured by Car Park Properties in Hong Kong which were ultimately beneficially owned by [D1].  The value of the Car Park Properties has been fairly valuated by an independent third party professional and is sufficient to fully secure each investment (“Car Park Security Misrepresentation”) …”[5] (Emphasis added)

(c)    “The Car Park Security Misrepresentation was made orally and/or in writing, occasionally with particular reference to [the Full Star Report] which stated that the value of 15 of the Car Park Properties in October 2006 was HK$25,968,000, ie HK$1,731,200 per car park space.”[6]

(d)    “The valuation of the Car Park Properties prepared by Full Star was in fact not an independent or fair valuation.  The Full Star staff member who conducted the valuation was none other than [D2] himself.”[7]

(e)    “Further, the Full Star report was a single page report adopting the “income approach” methodology, simplistically assuming that the rental yield of the Car Park Properties amounted to 5% of their sale value without any explanation of the bases for drawing such an assumption, and without any consideration of comparable market transactions.  On a proper and independent valuation, the Car Park Properties were significantly less than HK$1,731,200 per car park space as of October 2006…”[8]

8.  In the Re-Amended Defence of D1 and D4, it is pleaded[9]:

(1)     Prior to the signing of the first loan agreement in November 2006, D1 orally represented to some investors including Ps that the “the investment via the loans would be secured by 15 of the Car Park Properties in Hong Kong ultimately owned by him, and according to an independent valuation report [ie the Full Star Report], the said 15 of the Car Park Properties were valued at HK$25,968,000 as at October 2006.” (Emphasis added)

(2)     It is denied that D1 and D3 had ever represented to Ps that “the value of the Car Park Properties was sufficient to fully secure each investment” as alleged.

(3)     The valuation in the Full Star Report is an independent and fair valuation.

(4)     The “income approach” adopted in the Full Star Report is reasonable.  The sum of HK$25,968,000 was a reasonable valuation.  It is denied that the proper valuation per car park space as of October 2006 was significantly less than HK$1,731,200.

9.  Mr Peter Wong for D1 and D4 admitted that at nowhere in the Re-Amended Defence of D1 and D4, “car park business” was mentioned.

10.  In my view, it is clear that according to the pleadings, the subject matter in the Car Park Security Misrepresentation is the value of the 15 Car Park Properties beneficially owned by D1, not any car park business.

11.  As said in the above, issues are defined by the pleadings.  Based upon the current pleadings, I do not see any room for admitting expert evidence on the value of any “car park business”.  With respect, in my judgment, D1 and D4’s application did not get off the ground and must be dismissed.

Costs of the summons

12.  Ms Sharon Yuen for Ps sought indemnity costs against D1 and D4.  Ms Yuen submitted that in the hearing before Master Kot, D1 and D4’s stance was that it would be necessary to have valuation evidence on the Car Park Properties.  The court accepted the submissions and made the order dated 14 August 2019.  Subsequently, D1 and D4 adopted an entirely different position and sought expert evidence not on the value of the Car Park Properties, and on the value of some “car park business”.  This position contradicted their previous position.  No satisfactory explanation had been offered on this sudden change of stance.  This sudden change had caused much delay in these proceedings.

13.  Mr Wong’s primary position was that no adverse costs order should be made against D1 and D4.  Mr Wong’s alternative position was that if costs order was made against D1 and D4, those costs should be paid on the party and party basis, and no indemnity costs should be awarded.

14.  Mr Wong submitted that no adverse costs order should be made against D1 and D4, for the Master had not specified the SJE should be from which discipline in her order.  D1 and D4 had written to the court to seek clarifications, and the court directed that D1 and D4 should formally take out a summons to make an application.  In Mr Wong’s submissions, the summons was taken out as a result of the invitation from the court.  In these circumstances, although D1 and D4 failed in their application as per the summons, there should be no adverse costs order against D1 and D4.

15.  With respect, I am unable to accept these submissions.  I do not see any ambiguity in the Master’s order dated 14 August 2019.  The learned Master gave leave to the parties to adduce expert evidence from a SJE on the methodologies adopted in the Full Star Report and valuation of the 15 car park spaces mentioned in the Full Star Report.  It is abundantly clear that the matters to be covered by the SJE’s evidence would be (a) the methodologies adopted in the Full Star Report; and (b) the value of the 15 car park spaces. There is no need to seek any clarification from the court.

16.  In my view, D1 and D4 were not intending to seek clarification, but to seek variation of the order from the court.  They intended to have expert evidence on the value of “car park business”, not on the value of the 15 car park spaces.  Thus they took out the summons on 23 January 2020.

17.  The fact that the court reminded the parties to take out a summons for further expert directions does not mean that the court has invited any party to do anything.  Obviously, any application should usually be made by an inter partes summons.  To take out an application or not to take out an application is the choice of a party, and the party has to bear the consequences of his or her choice.

18.  In my judgment, there is no reason to depart from the general rule that costs should follow the event.  Costs of the summons should be paid by D1 and D4 to P forthwith.

19.  Mr Wong submitted that in any event, no indemnity costs should be ordered against D1 and D4.  Mr Wong referred me to an email from a Mr Wilson Leung of Midland Surveyors Ltd to D1 dated 3 October 2019, in which Mr Wilson Leung said:

“As discussed, we consider that [the Full Star Report] represented more a business valuation regarding operation of a carpark than a valuation report covering the market value of the property interest.

The market value of a property interest is subject to property shares, assignment plan, usage and limitations under government lease and Deed of Mutual Covenant (DMC), etc. The assessment of the market value of units in the carpark is of a different parameter than valuation of the operation of a carpark.

In this regard, it is considered a business valuation may be more appropriate than just valuation of the property interest to reflect the value of operating a carpark business.” 

20.  Mr Wong submitted that as a result of this email, D1 and D4 became to realize that it would be more appropriate to have expert evidence on the value of car park business, rather than on the value of the 15 car park spaces.  Mr Wong admitted that this was a change of stance.  However, Mr Wong submitted that the change was due to a good reason, ie the email from Mr Wilson Leung.

21.  The principles concerning indemnity costs have been succinctly summarized by DHCJ Marlene Ng (as she then was) in Heung Wing Yan v Hangway Housing Management Ltd[10], in which the learned judge said (footnotes omitted):

“19. Although the discretion to award indemnity costs is unfettered and uncircumscribed, there must be some special or unusual feature in the case to justify an order for indemnity costs. I accept indemnity costs are no longer limited to cases where a party’s conduct lacks moral probity or deserves moral condemnation for which the court wishes to express disapproval. But such conduct must be ‘unreasonable to a high degree; unreasonable in this context certainly does not mean merely wrong or misguided in hindsight…. It follows from all this …… it will be a rare case indeed where the refusal of a settlement offer will attract …… not merely an adverse order for costs, but an order on an indemnity rather than standard basis’. Further, whilst pursuit of a weak claim will not usually, on its own, justify an order for indemnity costs, the pursuit of a hopeless claim (or a claim which the party pursuing it should have realised was hopeless) may well lead to such an order.

20. But there is an infinite variety of situations which can come before the courts and which the courts may be consider appropriate to make an indemnity order.  So the court must consider each case on its own facts to ascertain whether there is something in the conduct of the action, or the circumstances of the case in question that takes it out of the norm so as to justify an award of indemnity costs.”

22.  Having considered the matter, I am of the view that indemnity costs are justified in the circumstances.

(1)     As stated in the above, based upon the present pleadings, the application made by D1 and D4 as per the summons is bound to fail.  With respect, the application can be described as a hopeless application.

(2)     In the light of the oral representation admitted by D1 in the Re-Amended Defence[11], it is clear that the subject matter in the representation is the value of the 15 car park spaces, not the value of any car park business.  That being the case, the email from Mr Wilson Leung should not lead to any change of stance by D1 and D4.  As per the admission in D1 and D4’s Re-Amended Defence, the subject matter of the oral representation is not any car park business.  In my judgment, D1 and D4 have offered no satisfactory explanation as to why they shifted their stance from the value of the 15 car park spaces to the value of some car park business. 

23.  I order that the costs payable by D1 and D4 to P be summarily assessed on an indemnity basis.

24.  There be leave to P to file and serve a bill of costs within 7 days.  There be leave to D1 and D4 to file and serve a written reply within 7 days thereafter.

25.  Lastly, it remains for me to thank counsel for the assistance rendered to the court.