LI CHO KWAN v. OLIVEIRO LANA AND ANOTHER

HCA 505/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 505 OF 2012

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J U D G M E N T
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Index

A. INTRODUCTION

B. THE INDISPUTABLE FACTS

C. LI’CLAIM AND OLIVEIRO’S DEFENCE

D. WHETHER HKBA WAS ACTING AS OLIVEIRO’S AGENT

E. WHETHER THE REPRESENTATIONS ARE ACTIONABLE

F. WHETHER LI’S CLAIM IN MISREPRESENTATION WAS EXCLUDED BY ANY CONTRACTUAL TERM

G. WHETHER LI RELIED ON THE REPRESENTATIONS

H. WHETHER THE REPRESENTATIONS WERE FALSE

H1. The 1^st Representation

H2. The 2^nd Representation

I. WHETHER THE REPRESENTATIONS WERE MADE FRAUDULENTLY  

J. LI’S ELECTION TO RESCIND THE SPA UPON DISCOVERING THE FALSITY OF THE REPRESENTATIONS

K. REMEDIES GRANTED TO LI

L. OLIVEIRO’S COUNTERCLAIM

M. CONCLUSION

A. INTRODUCTION

1.  This is the trial of the claim made by the plaintiff, Li Cho Kwan (“Li”), against the 1^st defendant, Oliveiro Lana, for misrepresentation.  On 29 August 2013, the 1^st defendant changed her name to Pemiga Oliveiro (“Oliveiro”). In respect of Li’s claim against the 2^nd defendant, Hong Kong Business Agency Ltd (“HKBA”), she has already obtained a final and interlocutory judgment against HKBA.

2.  This case is concerned with the sale of shares in a company called Maternia Trading Ltd (“Maternia”).  Oliveiro used to be the sole shareholder of Maternia.  Maternia was engaged in the trading of prenatal and postnatal products, baby care products and baby food.  It acted as both wholesaler and retailer in Hong Kong.  In about mid‑2011, Oliveiro decided to sell all her shares in Maternia.  At the same time, Li was interested to acquire a business.  HKBA was, apparently, a business consultancy firm assisting people to sell and buy businesses; and it acted as middleman in this transaction. Among other things, HKBA produced a business profile which contained an overview of Maternia.  Li’s case is that she had been induced by certain statements in the business profile into agreeing to buy the shares in Maternia.  However, she discovered very shortly after the completion of the sale that those statements were false.  Hence, she decided to rescind the sale and purchase agreement.

3.  Oliveiro denied that she was liable for the alleged misrepresentations on various grounds, including that she was unaware of the content of the business profile and HKBA was not acting as her agent in making the statements in the business profile.  She did not admit that the statements in the business profile were false.  She sought to rely on various clauses in the business profile and the sale and purchase agreement to support that she should not be held liable for misrepresentations in any event.

4.  At the trial, Li and her husband, Tsui Hing Shan (“Tsui”), on the one hand, and Oliveiro on the other hand, gave evidence.  In the light of the evidence given by the witnesses in court, in his closing submissions, Mr Yim for Oliveiro submitted that he would focus on one issue only, namely, the statements in issue in the business profile did not give rise to any actionable misrepresentations. Notwithstanding the concession made by Mr Yim, I shall analyse and set out my findings on the material issues below.  After all, the burden is on Li to prove her case.

B.  THE INDISPUTABLE FACTS

5.  Li is a university graduate holding a bachelor’s degree in business administration.  She was a housewife at the material time, but had worked in an auditing firm before.  Her husband, Tsui, is a certified public accountant in Hong Kong, and had worked in Deloitte before.  He had interests in a number of companies, some of which were engaged in pharmacy business.

6.  Oliveiro has received education up to Form 5 level.  At the material time, apart from running her business in Maternia, she acted as a host in a morning radio programme and a chef in her private kitchen business in the evening.

7.  Maternia (formerly known as Optimum Healthcare Limited) was incorporated in Hong Kong on 7 January 2008.  Between 7 January 2008 and 31 December 2010, Oliveiro was the sole director and shareholder in Maternia.

8.  At all material times, Maternia was engaged in the business of trading in prenatal and postnatal products, baby care products, as well as baby food.  It would buy the products from suppliers in Japan.  It would sell those products as wholesaler and also retailer in Hong Kong.  Its clients included persons in Hong Kong and Mainland China.

9.  On 18 August 2010, Oliveiro was adjudged bankrupt.  On 31 December 2010, she resigned as the sole director of Maternia.  One Mr Samuel Kam (“Kam”) replaced her, and became the sole director from 31 December 2010 to 1 August 2011.  By a power of attorney dated 20 May 2011, Kam authorized Oliveiro to manage and operate the business of Maternia.

10.  In about June 2011, Oliveiro decided to sell her business in Maternia.  She instructed a staff member of Maternia, Ms Gia Wong (“Wong”), to find a business brokerage firm to assist her to sell the business.  HKBA came into the picture as a result.

11.  Wong provided HKBA with information about Maternia.  HKBA then produced a business profile (ref no: CW000) (“the Business Profile”) concerning Maternia.  Section A contained a “Business Overview”.  The name of the business was not disclosed, and the business was simply described as:

「 柴灣母嬰日用品貿易公司及樓上鋪」

“ Maternal and baby daily care products trading company and upstairs retail shop in Chai Wan” (English translation)

12.  Under “Business Highlight” of this section, one can see the following statements:

- 4個主要日本供應商的香港分銷商，國內有固定貿易伙伴，每月訂購4–6個40" 貨櫃，送到上海，蘇州等主要港口。

- 每月營業額230萬，6% 利潤 (約14萬) 」

“ - Hong Kong distributorships of 4 major Japanese suppliers, regular trading partners in China, ordering 4–6 containers of 40 feet each month, shipped to major ports such as Shanghai, Suzhou etc.

- A monthly revenue of $2.3 million with 6% net profit (approximately $140,000 per month)” (English translation)

These two statements will be referred to as “the 1^st Representation” and “the 2^nd Representation” respectively, and “the Representations” collectively.

13.  In the same section, the “Listing Price” was stated to be $1,200,000.

14.  In section D of the Business Profile “Financial Information”, it was stated that the revenue was “HKD2,300,000 Cash basis” and that the profit was “HKD140,000”.  They appear to be repetitions of the 2^nd Representation.

15.  Section F “Additional Remarks” reads as follows:

“Disclaimer:

Any information related to the Business under business profile is provided by vendor on ‘as is’ basis. HKBA posted the same for Purchaser’s reference only. HKBA shall not be held responsible or liable for any discrepancies, omission, understatement or misrepresentation. All terms and conditions shall be referred to the Sale and Purchase Agreement.

此業務簡介之資料由賣方提供，僅為參考用途，商機無限不會為任何資料出入，錯誤陳述或遺漏負責，所有條款以最終簽訂之買賣協議書為準。” (“the Disclaimer Clause”)

16.  In around July 2011, Li was interested to acquire an ongoing business engaged in the trading of baby care, prenatal and postnatal products.  She approached HKBA for assistance.  By a Confidentiality and Service Agreement dated 6 July 2011 (“the Service Agreement”), she engaged HKBA to purchase a business from potential vendor on the terms and conditions stated therein.  At the material time, one Ms Li Suet Hing Sandy (“Sandy Li”) and one Mr Ma Siu Kwan Alex (“Alex Ma”) were representing HKBA.

17.  The Service Agreement is a one‑page document containing both a Chinese and an English version.  It provided expressly that, should there be any discrepancies between the Chinese version and the English version, the English version shall prevail.  Clause 4 in the “Remarks” section reads as follows:

“ Any information related to the business profile given by HKBA to Buyer is provided by potential vendor to HKBA for reference only.  HKBA shall not be held responsible or liable for any discrepancies.  All information is subject to the terms and conditions of the Conditional Sale and Purchase Agreement.”  (“the Remark Clause”)

18.  Li said that Sandy Li of HKBA gave her the Business Profile on the same occasion when she signed the Service Agreement on 7 July 2011 (though it was dated 6 July 2011).

19.  Li met Sandy Li and Alex Ma several times.  She was also taken to Maternia’s office in Chai Wan.  However, Li and Oliveiro only met at a café in Times Square, Causeway Bay, in the afternoon on 19 July 2011.  Tsui, Sandy Li and Alex Ma were also present.

20.  In that meeting, Li and Oliveiro signed a sale and purchase agreement dated 19 July 2011 (“the SPA”).  Under the SPA, Oliveiro agreed to sell and Li agreed to buy the entire ownership in Maternia by way of transfer of shares at the price of $900,000.  The completion date, or “handover date” as described in the SPA, was 1 August 2011.

21.  Clause 8 under section “Other terms” provided that:

“ Completeness: This Agreement executed in writing supersedes all oral representations of either of the parties.  It may be amended only by written consent of HKBA.”  (“the Entire Agreement Clause”).

22.  On the same occasion, Li and Oliveiro also signed a “附加協議條款”, in English “Additional Terms to Agreement” (“the Supplemental SPA”). It contained the following provisions concerning payment of the price:

「5. 買方於2011年7月19日支付成交價30%予 "商機無限" 為訂金，2011年7月26日支付其餘70% ；"商機無限" 於2011年8月1日支付賣方70%應收款項，其餘30%按以下第6項放款標準放款；

6. 如買方接手首三個月每月平均可交易三四個貨櫃，而毛利 (賣貨價扣除來貨價，未扣除其他任何成本) 達56% ，"商機無限" 應發放15% 成交款項予賣方；買方接手第四至六個月每月平均可交易三四個貨櫃，而毛利 (賣貨價扣除來貨價，未扣除其他任何成本) 達56% ，"商機無限" 應發放最後15% 成交款項予賣方；

   7. 如第六項之毛利未達56% ，則 "商機無限" 應按實際毛利按比例扣減款項退還買方。….」

“5. The Purchaser shall pay 30% of the transaction price to [HKBA] as deposit on 19 July 2011, and shall pay the remaining 70% of the transaction price on 26 July 2011; [HKBA] shall pay 70% of the sum payable to the Vendor on 1 August 2011; the remaining 30% shall be released in accordance with the standard for release stated in clause 6 herein.

6. If the Purchaser has a monthly transaction average of 34 containers in the first three months after the takeover with a profit margin (being the remainder after the deduction of costs of sale from the cost of goods, exclusive of any other costs) reaching 56%, [HKBA] shall release 15% of the transaction price to the Vendor; if the Purchaser has a monthly transaction average of 34 containers between the 4^th and 6^th months after the takeover with a profit margin reaching 56%, [HKBA] shall release the final 15% of the transaction price to the Vendor.

7. If the profit margin under clause 6 does not reach 56%, [HKBA] shall deduct from the amount payable to the Vendor in proportion to the actual profit margin and refund the same to the Purchaser. …” (English translation)

23.  Pursuant to the SPA and the Supplemental SPA, Li paid:

(a) $270,000, being 30% of the price, by a cheque dated 19 July 2001 made payable to HKBA; and

(b) $630,000, being the remaining 70% of the price, by another cheque dated 27 July 2011 also made payable to HKBA.

24.  In addition, Li paid service fees in the sum of $68,000 to HKBA by a cheque dated 19 July 2011.

25.  The sale and purchase of the shares in Maternia was completed on 1 August 2011 pursuant to the SPA.  Li and Oliveiro executed an instrument of transfer dated 1 August 2011 whereby Oliveiro transferred 10,000 shares in Maternia to Li.  Notices concerning resignation and appointment of director and secretary of Maternia were also filed to the Companies Registry.  It appears that these documents were all signed on 27 July 2011.

26.  As to the sum of $630,000 (ie 70% of the purchase price), Oliveiro claimed that she had only received $550,000 from HKBA, and the remaining sum of $80,000 had been kept by HKBA.

27.  As to the sum of $270,000 (being 30% of the purchase price), it was held by HKBA as a stakeholder pursuant to the Supplemental SPA.

28.  There were disputes between the parties concerning the handover of the business almost immediately after the completion of the sale.  Li also discovered that Oliveiro was an undischarged bankrupt, and that the Representations were false.

29.  By a letter dated 12 August 2011 (“the 12 August 2011 Letter”), Li, through her solicitors, wrote to Oliveiro as follows:

“ …

We are instructed that relying on the representation made by you and/or your agent namely Hong Kong Business Agency Limited as contained in and/or evidenced by a Business Profile (Ref. No.:CW000) in relation to the particulars of [Maternia], our client agreed to purchase and you agreed to sell all her shares of [Maternia] at a price of HK$900,000.00, and the parties entered into a Sale and Purchase Agreement (‘the Agreement’) and a Supplementary Agreement on 19 July 2011.

…

Besides, after the completion of the sale and purchase of [Maternia], our client found out that the representation as contained in and/or evidenced by the Business Profile, in particular the part under ‘Business Overview’, which had induced our client to enter into the Agreement and Supplementary Agreement, are untrue.

…

In view of the above, we are instructed to, which we hereby do, give you a FORMAL NOTICE that the Agreement and the Supplementary Agreement … be rescinded for … your and/or your agent’s misrepresentation.”

30.  On 9 November 2011, the bankruptcy order against Oliveiro was annulled.

31.  On 27 March 2012, Li issued the writ of summons herein.

32.  On 22 May 2012, Li obtained a default judgment against HKBA.

33.  On 23 October 2013, HKBA was wound up by the court upon the petition of Li.  Mr Wong Sun Keung and Ms Tsui Mei Yuk Janice, both of Vision A S Ltd, were appointed as the joint and several provisional liquidators of HKBA.  The sum of $270,000 has since then been held by the provisional liquidators pending the conclusion of these legal proceedings.

C.  LI’CLAIM AND OLIVEIRO’S DEFENCE

34.  In the Statement of Claim, insofar as her claim against Oliveiro is concerned, Li pleaded that:

(a) HKBA was acting as the agent for and on behalf of Oliveiro.

(b) Oliveiro breached various express and implied terms of the SPA and the Supplementary SPA.

(c) Alternatively, she had relied on and was induced by the Representations into signing the said agreements, which were false.

(d) Oliveiro, through HKBA as her agent, made the Representations fraudulently in that she knew that they were false and/or was reckless, not caring whether they were true or false.

(e) If the Representations were not made fraudulently, she would reply on section 3 of the Misrepresentation Ordinance (Cap 284) (“the MO”).

(f) She discovered that each of the Representations were false when she took over the business of Maternia on 1 August 2011.

(g) he was entitled to, and had elected to, rescind the SPA and the Supplementary SPA by the 12 August 2011 Letter.  She has also suffered loss and damage including the purchase price, the service fees paid to HKBA, and miscellaneous cost and expenses relating to Maternia incurred after she took it over.

35.  In the Amended Defence and Counterclaim:

(a) Oliveiro referred to the terms in the Service Agreement, the Business Profile and the SPA, including the Remark Clause, the Disclaimer Clause and the Entire Agreement Clause.

(b) She claimed that the Business Profile was not prepared, approved or confirmed by her; HKBA did not act as her agent to represent any information of the Business (which was not provided by her) to Li; she had not authorized HKBA to make any false representation to Li.

(c) She alleged that she had specifically made known to HKBA that she or Maternia could not provide a complete set of financial information and accounting records, and in particular, transactions with parallel importers.

(d) She denied that the Representations were false; Li relied on the Representations and entered into the SPA and the Supplemental SPA as a result; or she made the Representations fraudulently.

(e) She counterclaimed mainly for the sum of $270,000 which was part of the purchase price that she had not yet received.

36.  In the statement of claim, Li sued Oliveiro in misrepresentation and for breach of contract.  It appears to me that, in the present context, these two causes of action were mutually exclusive, and she had to make an election.  In his opening submissions, Mr Sung confirmed that Li would only pursue her claim in misrepresentation.

37.  I shall now turn to consider the issues in relation to Li’s claim in misrepresentation.

D.  WHETHER HKBA WAS ACTING AS OLIVEIRO’S AGENT

38.  Oliveiro claimed that the Business Profile was not prepared, approved or confirmed by her.  She also claimed that HKBA did not act as her agent to represent any information of the Business; and she had not authorized HKBA to make any such representation to Li.

39.  Whether HKBA was acting as an agent, not only for Li, but also for Oliveiro, must be a question of fact depending on the particular circumstances of this case (Cheng Kwok Fai v Mok Yiu Wah Peter & Anor [1990] 2 HKLR 440 at 445E–I).  The question is whether HKBA had actual, or apparent, or both types of authority to make the Representations on behalf of Oliveiro to Li.

40.  In the statement of claim, Li relied on the following facts, which had not been disputed, to support her case that HKBA was acting as the agent of Oliveiro at all material times:

(a) HKBA attended all meetings with Li whether or not in the presence of Oliveiro.

(b) HKBA made the Representations in the Business Profile to Li.

(c) HKBA received the sum of $968,000 from Li.

(d) HKBA issued the receipts for the said sum to Li.

41.  There were clear indications on the face of the SPA that, to the knowledge of both Li and Oliveiro, HKBA was acting as an agent for both parties in this transaction.  In the SPA, clause 6 under section G “Other terms” provided that:

“ Role of HKBA: HKBA is acting only as an agent and assist in executing this agreement in this transaction. Both parties will hold HKBA harmless in any legal dispute.”

And clause 10 under the same section provided that:

“ Buyer & Vendor hereby declares that each party has signed the Confidentiality & Service Agreement and Listing agreement respectively before signing this agreement.”

42.  An original Listing Agreement was produced by Li at the trial (“the Listing Agreement”).  She found it in Maternia’s office after she took over the business on 1 August 2011.  It was stapled together with a “Vendor Information”.  In the Vendor Information, one Ms Tai was named as the contact person.  Tai was the Chinese surname of Oliveiro at that time.  Oliverio’s mobile phone number at that time was given as contact information.  The Listing Agreement was signed by Wong on 2 June 2011.  I note that Kam was named as the vendor in the Listing Agreement.  However, Oliveiro admitted in court that this was an agreement that she had asked Wong to sign on her behalf in order to instruct HKBA to assist her to sell her shares in Maternia.

43.  Oliveiro also stated in her witness statement that, out of the 70% of the purchase price in the sum of $630,000, she had only received $550,000 and she believed that HKBA had deducted $80,000 as agency fee.  There cannot be any doubt that HKBA was acting as an agent for Oliveiro.

44.  Clause 2 in the first section of the Listing Agreement provided that:

“ Any information related to the Business is provided by Vendor to HKBA. HKBA shall not be responsible or liable whatsoever for any responsibilities and/or liabilities as a result of any dispute between Buyer and Vendor. If there are any changes or updates of the Business Profile, it may be amended only by written consent of HKBA.”

It was clearly contemplated that Oliveiro would provide information concerning Maternia’s business to HKBA in order to enable it to compile a business profile, and that such business profile would be shown to potential purchasers.

45.  As mentioned above, the Disclaimer Clause in the Business Profile (and also the Remark Clause in the Service Agreement) also provided expressly that any information relating to Maternia’s Business was provided by the vendor.

46.  Oliveiro said that she had instructed Wong to handle the sale of her shares in Maternia for her.  Wong was the person who provided information about Maternia’s business to HKBA.  While Oliveiro admitted that she knew that a business profile would be prepared by HKBA for potential purchasers, she claimed that she did not know the content of the Business Profile.  She also claimed that she could not even remember when the first time she read the Business Profile was.

47.  Irrespective of whether Oliveiro was actually aware of the content of the Business Profile, in view of the above evidence, there is no doubt that HKBA’s authority as her agent included the authority to pass on information concerning Maternia’s business (including the Representations in the Business Profile) to potential purchasers.  In his closing submissions, Mr Yim realistically conceded this point.

E.  WHETHER THE REPRESENTATIONS ARE ACTIONABLE

48.  As stated above:

(a) The Remark Clause in the Service Agreement provided that:

“ Any information related to the business profile given by HKBA to Buyer is provided by potential vendor to HKBA for reference only. HKBA shall not be held responsible or liable for any discrepancies. All information is subject to the terms and conditions of the Conditional Sale and Purchase Agreement.”

(b) The Disclaimer Clause in the Business Profile provided that:

“ Any information related to the Business under business profile is provided by vendor on ‘as is’ basis. HKBA posted the same for Purchaser’s reference only. HKBA shall not be held responsible or liable for any discrepancies, omission, understatement or misrepresentation. All terms and conditions shall be referred to the Sale and Purchase Agreement.”

49.  In his closing submissions, the only point that Mr Yim pursued seriously is that, because of the clear wordings of the two said clauses, Li (and her husband), both well‑educated, as reasonable readers of the Business Profile, could not possibly regard the Representations in that document as definitive statements of fact, and hence make it unnecessary to verify their accuracy and truth before acting on the same.

50.  I take the view that it is necessary to distinguish between the two following questions:

(a) Whether the Representations, if false, are actionable?

(b) Whether Li actually relied on the Representations?

It appears to me that Mr Yim might have conflated the two questions in his submissions.  At this stage, I shall focus on the first question.

51.  As Walton J remarked in De Beers Abrasive Products Ltd v International General Electric Co of New York Ltd [1975] 1 WLR 972 at 978:

“ It is a blinding glimpse of the obvious to say that there must be a dividing line between statements that are actionable and those which are not; …”

Although it appears that the core question is whether the statement is one on which the representee was entitled to rely on, there is no single test which defines when a misrepresentation is actionable.  As observed in Cartwright, Misrepresentation, Mistake and Non‑disclosure (3^rd edn, 2012), §3‑12 at p 43:

“ In different contexts, and for each of the several remedies, different expressions are used to define actionable misrepresentations. Sometimes it is said that a misrepresentation will not be actionable because it was only a statement of opinion or law and not a statement of fact; or it was only ‘sales talk’; or it was not a statement that the defendant had any duty to be careful in making; or it was not reasonable in the circumstances for the claimant to have relied on the statement. Whichever expression is used, the courts are seeking to identify those statements on which the representee ought to be entitled to rely.”

52.  In this case, Mr Yim relied mainly on the wording of the two said clauses, in particular, the phrase “for reference only” which appeared in both clauses.  He submitted that the present case is similar to the case of Yang Dandan v Hong Kong Resort Co Ltd, HCA 1787/2010 (2 October 2015, unreported).

53.  In Yang Dandan v Hong Kong Resort Co Ltd, the plaintiff claimed that she relied on a written misrepresentation in a floor plan brochure concerning the sale of units in a residential development.  DHCJ Kent Yee held that there was no actionable misrepresentation.  Mr Yim relied in particular on the following paragraphs in the judgment:

“44. In the first place, the Amalfi’s Description has to be interpreted in its context. The entire Brochure should be considered. On the very same page where the Amalfi’s Description was made, it is clearly printed albeit in small print that ‘all information and photos are for reference only’ and that ‘the developer reserves the right to make modifications and changes to the future development without prior notice.’ Given these disclaimers, I cannot understand how a reasonable person can still rely on the Amalfi’s Description as a statement of any existing fact and present the same as an actionable misrepresentation.

45. Mr Yu [for the Company] refers me to Chao San San and Anor. v Worldpart Industrial Ltd and Ors, unreported, HCA 14189/1998, 20.12.2001 where DHCJ To (as he then was) came across a similar disclaimer in a brochure relating to a property. DHCJ To (at §31) held that when a piece of information or photograph is stated to be ‘for reference only’, the information or representation contained in the photograph is just an indication of what the representor hopes or wishes or aims to achieve. There is no undertaking that the representation contained in the photograph will materialize or that the information is correct.

46. I agree to the analysis of the deputy judge.  The disclaimers in the Brochure were so clear that a reasonable reader of the Brochure even with lesser commercial and education background could not possibly regard the Amalfi’s Description as any definitive statement of fact. It is only reasonable necessary to verify the accuracy and truth in any information in the Brochure before one could act on the same.”

54.  In Chao San San & Anor v Worldpart Industrial Ltd, DHCJ To (as he then was) held in §31:

“ 31. As for the amenities, there was no mention about them in the Subscription Letter, but they were described in the Brochure and Pamphlet. The Defendant’s manager had informed the Plaintiffs that everything would be in accordance with the Brochure and Pamphlet. The provisions in the Brochure and Pamphlet could therefore be incorporated into their agreement. At the end of the Brochure is a statement as follows:

‘all information and photos provided in this brochure is for reference only, please kindly refer to the DMC, Approved building plans and Sales & Purchase Agreement, the full scripts of which are available upon request.’

Thus the representation about the amenities was for reference only.  When a piece of information or photograph is stated to be ‘for reference only’, the information or representation contained in the photograph is just an indication of what the representor hopes or wishes or aims to achieve.  There is no undertaking that the representation contained in the photograph will materialize or that the information is correct.  They are just for indication only and do not form part of the contract.”

It is useful to read the next paragraph, §32:

“32. Mr Wong [for the Plaintiffs] referred to the case of Balchita Ltd v Kam Yuck Investment Co Ltd [1983] 2 HKC 333 in which a brochure was held to constitute an inducement to buy and the case of Shun Ying Hing Ellen v Far East Real Estate & Agency (HK) Ltd [1984] HKC 52 in which a purchaser was allowed to rescind a contract for the vendor’s failure to complete the swimming pool and other amenities. Both authorities are clearly distinguishable from the present case. In Balchita Ltd, the representation relating to the ground floor of a building to be sold was a representation as to an existing fact as construction of the building had by the material time reached the first floor level. The representation in the present case is about the future. In Shun Ying Hing Ellen v Far East Real Estate & Agency (HK) Ltd, the contract was expressly for the purchase of property with the pool and amenities in accordance with the building plans. In the present case, the Brochure stated that the information was for reference only. I find that information in the Brochure did not form part of the contract.”

55.  In my view, in considering whether a misrepresentation is actionable, judicial precedents are, generally speaking, of little assistance.  As is often said, in law, context is everything.  Both precedents mentioned above were concerned with representations about something which was still under planning and not yet materialized.  It is easy to understand why the learned judges in both cases came to the view that the phrase “for reference only” connoted that the representations in question were just “an indication of what the representor hopes or wishes or aims to achieve” and hence, a reasonable reader of those documents would not regard those representations as “any definitive statement of fact”.  I do not believe the learned judges in the both precedents intended to lay down any rigid rule that the phrase “for reference only”, irrespective of the context in which it was used, would render any misrepresentation contained in the document in question not actionable.

56.  I am aware that, sometimes, the phrase “for reference only” or like may have the effect of rendering what might appear to be a statement of fact not a representation of fact properly‑so‑called.  A good example can be found in Montrio Ltd & Anor v Tse Ping Shun David, HCA 757/2009 (29 November 2011, unreported).  That case was concerned with a statement that the gross area of a property was 12,254 square feet approximately.  The relevant document issued by the estate agent contained a remark clause as follows:

“The property is offered subject to contract and availability. Interested parties should satisfy themselves as to the accuracy of the particulars contained herein which are provided by us for information only. No warranty for accuracy is given or implied by the owners or us. Meanwhile interested parties should be aware that we are also acting as agent for the owners.”

I believe the phrase “for information only” (used in the remark clause in that case) bears, in most cases, substantially the same meaning as “for reference only”.  Poon J (as he then was) held that the statement was not an actionable representation.  He explained in §70:

“70. Here, the Statement must be understood in the entire context of the 2008 Centaline Leaflet and the Ricacorp Leaflet. And the Remark made it abundantly clear and in fact beyond any doubt that the Statement was for reference only and no warranty is given on its accuracy. Properly understood, the Statement is simply not a representation of fact which can mount a case of misrepresentation.”

There were two distinguishing features in that case.  Firstly, the gross area of the property was stated to be an approximate only.  Secondly, apart from stating that the statement was “for information only”, there were express statements that “No warranty for accuracy is given or implied by the owners or us” and that “Interested parties should satisfy themselves as to the accuracy of the particulars contained herein …”. In other words, there was a clear and unequivocal disclaimer about the accuracy of the statement.  Poon J (as he then was)’s judgment on this issue was approved by the Court of Appeal in CACV 291/2011 (28 December 2012, unreported).  In §51, Kwan JA held that:

“ … The judge is entitled to hold, looking at the matter objectively, and by reason of the Remark, the Statement was for reference only and no warranty was given on its accuracy.”

This case shows that the phrase “for reference only”, or “for information only”, may assist the court to consider objectively whether a representation of fact properly‑so‑called has been made.  But it also highlights the important point that such phrase must be considered in its context.

57.  I shall consider the Remark Clause in the Service Agreement first.  I do not agree that it has the effect of rendering the Representations, if false, not actionable:

(a) The Service Agreement was an agreement between Li and HKBA whereby Li appointed HKBA as her agent to purchase a business. This was not an agreement which intended to govern the legal relationship between Li and the potential vendor.

(b) The Service Agreement was a standard form document.  The Remark Clause would appear in every service agreement signed by HKBA with any of its clients who sought its assistance to purchase a business.

(c) The first sentence of the Remark Clause reads “Any information related to the business profile given by HKBA to Buyer is provided by the potential vendor to HKBA for reference only.”  The subject matter of this sentence was “any information related to the business profile”.  It clearly meant and referred to information concerning the business described in a particular business profile.  Such information may, of course, include statements of fact concerning that particular business.

(d) The first point made in the first sentence was that whatever information concerning the business as stated in any business profile to be provided by HKBA to Li was indeed provided by the potential vendor to HKBA.  In other words, it was concerned with the source of information contained in a business profile.  HKBA was making it clear that it was not the source of such information.  That must be why in the second sentence, HKBA sought to protect itself by providing that “HKBA shall not be held responsible or liable for any discrepancies”.

(e) The second point made in the first sentence was that such information was “for reference only”.  As information concerning a particular business may include existing facts, I cannot accept that the use of such phrase, in this context, connoted that the information was “just an indication of what the representor hopes or wishes or aims to achieve”.

(f) I believe that it should be considered with the third, and the last, sentence in that clause, which reads “All information is subject to the terms and conditions of the Conditional Sale and Purchase Agreement.”  The subject matter of this sentence is “all information”; it must be a reference to the “information” mentioned in the first sentence.  I take the view that the phrase “for reference only” merely connoted what the last sentence in that clause provided, namely, the information in the business profile would be subject to the terms of the sale and purchase agreement actually executed by Li and the potential vendor (if any).

(g) The terms and conditions of the sale and purchase agreement must be a matter to be agreed between Li and the potential vendor.  Whether any information contained in the business profile, if false, may support a claim in misrepresentation must depend on the exact terms and conditions of the sale and purchase agreement.  For example, some information contained in the business profile (in its original or revised form) may be incorporated, and become a term, in the agreement.  It was also possible that the sale and purchase agreement may contain an exemption clause, a “no‑reliance” clause or the like; in such event, how such clauses would impact on any claim for misrepresentations based on the information in the business profile would depend on the proper interpretation of such clauses.  However, the sale and purchase agreement did not necessarily contain any provision which would have any impact on a claim for misrepresentations based on the information in the business profile.

(h) For these reasons, in my view, the Remark Clause does not have the effect of rendering any representation in a business profile to be provided by HKBA to Li, if false, not actionable.

58.  I turn to the Disclaimer Clause in the Business Profile.  This seems to be more significant because this was a provision which appeared in the document that contained the Representations. Again, I have come to the conclusion that the Disclaimer Clause does not have the effect of rendering the Representations, if false, not actionable:

(a) The first sentence reads “Any information related to the Business under business profile is provided by vendor on ‘as is’ basis.”  Apart from repeating that the source of the information was the vendor, the phrase “ ‘as is’ basis” is telling.  I note that this phrase did not appear in the Chinese version of that clause but there was no suggestion that this clause should or could be ignored.  The phrase “as is” connoted that the information in this Business Profile was information reflecting the then existing condition of the business.  Such information was presented as statements of existing fact, rather than any statement of future plan or intention to be achieved. This was indeed confirmed by the Representations themselves.  They were concerned with the number of containers of goods ordered by Maternia, as well as the monthly turnover and profit of Maternia.  They were clearly representations of existing facts.

(b) The second sentence reads “HKBA posted the same for Purchaser’s reference only.”  If one reads this sentence together which the first sentence which stressed that the information was provided by the vendor, again, one can easily understand why HKBA saw fit to insert the third sentence which reads “HKBA shall not be held responsible or liable for any discrepancies, omission, understatement or misrepresentation.”  It served the same intended purpose as the second sentence in the Service Agreement considered above.  It is clear that HKBA intended that these sentences in the Service Agreement and the Business Profile would serve as exemption clauses exempting it from any potential liability for misrepresentations due to any falsity about the information in the Business Profile.  Whether they constituted legally valid and enforceable exemption clauses is not a matter that I need to decide for the present purpose.

(c) What is however noteworthy is that in both the Remark Clause in the Service Agreement and the Disclaimer Clause in the Business Profile, it was only stated that “HKBA” shall not be responsible for any misstatements in the Business Profile.  It did not cover the vendor, or Oliveiro in this particular case.  Further, the fact that HKBA saw the need to insert exemption clauses to protect itself supports that HKBA was concerned that information in the Business Profile, if untrue, was capable of giving rise to potential legal liability.

(d) Returning to the phrase “for Purchaser’s reference only” in the second sentence of the Disclaimer Clause, I believe that it ought to be read together with the last sentence which reads “All terms and conditions shall be referred to the Sale and Purchase Agreement.”  In my view, they meant that the information in the Business Profile, and any other information, shall be subject to the terms and conditions of the sale and purchase agreement.  In other words, the information was not necessarily final and conclusive, and it would depend on the terms and conditions of the sale and purchase agreement.  In short, this part of the Disclaimer Clause served the same purpose as the phrase “for reference only” and the third sentence in the Service Agreement as analysed above.

(e) For these reasons, I take the view that the Disclaimer Clause does not have the effect of rendering any representation in the Business Profile, if false, not actionable.

59.  Furthermore, the suggestion that it was unreasonable in the circumstances to rely on the Representations, or to take them seriously, seems to me to be commercially unrealistic:

(a) One must bear in mind the purpose of the Business Profile.  Its purpose was to introduce the business to the potential buyer, namely, Li.

(b) The information concerning the business of Maternia, including the Representations, was information that the potential buyer was expected, and intended, to rely on in deciding whether to buy the business or not.  They were part of the “Business Highlight” under section A “Business Overview” in the Business Profile.  In practice, the key purpose of making the Representations was to persuade the potential buyer to buy the business.

(c) The Representations were clearly statements and representations of fact.  In relation to the monthly revenue (ie $2,300,000) and profit margin (6%), they were presented as precise and specific figures without any qualification.  I note that the monthly profit of $140,000 was qualified by the word “approximately”.  However, the qualification was added because, as a matter of arithmetic, 6% of $2,300,000 would be $138,000, and not $140,000.  They were not vague statements incapable of verification objectively. They could not be regarded as mere “sales talk” not intended to be taken seriously.

(d) In addition, there was no express provision to the effect that the vendor did not warrant the accuracy of the information in the Business Profile, and that the potential purchaser shall verify for himself the accuracy of such information by whatever means.

60.  Mr Yim submitted that, in considering whether the Representations, if false, gave rise to actionable misrepresentations, I shall take into account the personal background of Li and her husband.  I take the view that, because Mr Yim’s submissions on this issue depend on the proper construction of the Remark Clause and the Disclaimer Clause, and that construction of a document is an objective exercise, I should approach the matter by reference to the meaning that those clauses would convey to a reasonable man.  The actual background of Li and her husband is perhaps relevant only insofar that it may assist the court in deciding what the reasonable man in the present context should be.  To that extent, I have taken into account the background of Li and Tsui.

61.  Li and her husband said in court that they did not pay much attention to the said clauses.  Mr Yim submitted that their evidence in this respect is incredible.  I take the view that they must be aware of those clauses, although they might not have focused on them.  In any event, Li had signed the Service Agreement containing the Remark Clause; it was not open to her to claim that she was unaware of it.  Nevertheless, I am of the opinion that a reasonable man in the position of Li would have read, and been aware of the content of, those clauses.  Having said that, my views in this respect does not impact on my conclusion on this issue.

62.  For the above reasons, I reject the main submission made by Mr Yim.  I hold that the Representations, if false, would give rise to actionable misrepresentations.

F.  WHETHER LI’S CLAIM IN MISREPRESENTATION WAS EXCLUDED BY ANY CONTRACTUAL TERM

63.  As I said earlier, both the Remark Clause in the Service Agreement and the Disclaimer Clause in the Business Profile provided that the information in the Business Profile would be subject to the terms and conditions of the sale and purchase agreement to be executed between the parties.

64.  In Mr Yim’s opening submissions, he submitted that the clear wording of the Entire Agreement Clause in the SPA would give a clear answer to Li’s claim in misrepresentation.  As mentioned, that clause reads as follows:

“Completeness: This Agreement executed in writing supersedes all oral representations of either of the parties. It may be amended only by written consent of HKBA.”

65.  I take a firm view that this clause could not exclude Oliveiro’s potential liability for misrepresentations due to the falsity of the Representations:

(a) First and foremost, the simple point is that the Entire Agreement Clause only sought to supersede “oral” representations; it did not seek to supersede “written” representations.  Hence, it did not cover the Representations, which were written representations contained in the Business Profile.

(b) Second, while each clause must be construed individually, generally speaking, an entire agreement clause does not preclude a claim in misrepresentation (Yang Dandan v Hong Kong Resort Co Ltd, §§80 – 85). In particular, in respect of an entire agreement clause which purported to supersede, inter alia, representations made orally or in writing, the English Court of Appeal held in AXA Sun Life Services Plc v Campbell Martin Ltd & Ors [2011] 2 Lloyd’s Rep 1 that such a clause did not exclude the liability for misrepresentations.  I doubt whether the Entire Agreement Clause was sufficiently clear to exclude liability for misrepresentations even made orally.  However, this is not a matter that I need to decide.

66.  Mr Yim did not pursue his argument in relation to the Entire Agreement Clause in his closing submissions.  It is unnecessary for me to consider Mr Sung’s submissions that the Entire Agreement Clause should be construed as an exemption clause, and that it was unenforceable because of section 4 of the MO, or section 3 of the Control of Exemption Clauses Ordinance (Cap 71).

67.  Apart from the Entire Agreement Clause, Mr Yim has not suggested that there was any other term in the SPA or Supplemental SPA which may exclude, or impact on, Oliveiro’s potential liability for misrepresentations due to the falsity of the Representations.

68.  In short, I hold that the SPA and the Supplemental SPA did not contain any provision which could exclude Oliveiro’s potential liability for misrepresentations.

G.  WHETHER LI RELIED ON THE REPRESENTATIONS

69.  As I stated earlier, whether the Representations, if false, are actionable and whether Li had actually relied on the Representations are two separate questions.  As I have held that the Representations, if false, are actionable, I shall now move on to consider the issue of reliance.  The burden of proof is on Li to prove reliance on the Representations.

70.  It is crucial to note that the question is whether Li actually relied on the Representations, not whether it was reasonable for her to do so.  Having said that, whether it was reasonable to rely on the Representations is relevant to the onus of proof, and how the burden of proof on Li may be discharged.  As Lam JA (as he then was) held in Master Yield Ltd v Ho Foon Yung Anesis & Anor [2013] 6 HKC 520 at527C–D, §22:

“… The ultimate question is whether a representee was induced by the representation and it is a question of fact to be asked in respect of this particular representee (as opposed to an objective reasonable bystander). The effect of a representation on an objective reasonable bystander is only relevant in terms of onus of proof. …”

At pp 526H – 527C, §21, the learned judge cited Museprime Properties Ltd v Adhill Properties Ltd [1990] 2 EGLR 196 at 201M where Scott J (as he then was) held that:

“ A representation is material, in my opinion, if it is something that induces the person to whom it is made, whether solely or in conjunction with other inducements, to contract on the terms on which he does contract. I would gratefully adopt the view expressed in Goff & Jones on the Law of Restitution 3^rd Ed, at p 168, which reads,

‘In our view any misrepresentation which induces a person to enter into a contract should be a ground for rescission of that contract. If the misrepresentation would have induced a reasonable person to enter into the contract then the court will, as we have seen, presume that the representee was so induced and the onus will be on the representor to show that the representee did not rely on the misrepresentation either wholly or in part. If, however, the misrepresentation would not have induced a reasonable person to contract, the onus will be on the representee to show that the misrepresentation induced him to act as he did. But these considerations relate to the onus of proof. To disguise them under the cloak of “materiality” is misleading and unnecessary.’

... I respectfully agree with that view of the law ...”

71.  In respect of the objective effect of the Representations, I repeat what I said above as to why, in my view, they, if false, would give rise to actionable misrepresentations.  In short, I take the view that a reasonable man would be induced by them into entering into the SPA.  The Representations were concerned with the scale of the business and its profitability; they must be highly material information to any reasonable potential purchaser.  Hence, the burden is on Oliveiro to prove that Li had not in fact relied on the Representations.

72.  Turning to the subjective state of mind of Li, I think the court should be cautious in evaluating self‑serving statements made by a plaintiff that he or she has relied on a representation.  Such statements can be easily made after the event to support a claim.  As mentioned earlier, Li claimed that she did not pay much attention to the Disclaimer Clause in the Business Profile or the Remark Clause in the Service Agreement.  The potential significance of this piece of evidence is that, if Li was in fact aware of those clauses contrary to what she claimed, it might be argued that she had been alerted to possible inaccuracies in the Representations and, hence, one might draw an inference that she had not in fact relied on them.

73.  Having regard to their personal background, as I said above, while I am prepared to accept their evidence that they may not have paid much attention to those clauses or considered their potential implications in detail, I take the view that they must have read, and were aware of the content of, those clauses.  However, I do not think their knowledge of the content of those clauses can support an inference that Li had not actually relied on the Representations.  To begin with, there is no evidence that Li (or Tsui) did not take the Representations seriously because of those clauses. More importantly, there are three pieces of compelling evidence supporting that Li had relied on the Representations.

74.  Firstly, Oliveiro said that, after signing the SPA, because the updated financial reports of Maternia was not yet available, she had proposed to Li that the completion of the sale be postponed but Li rejected the proposal.  Li and Tsui agreed that HKBA had told them that the updated financial records were not yet available.  But they explained that they decided not to wait for the updated financial reports and to adhere to the complete date in the SPA (ie 1 August 2011) because they trusted the information in the Business Profile.

75.  The second piece of evidence is concerned with the agreed price of $900,000 in the SPA.  Li said that, initially, HKBA told her that the sale price was $1,200,000 (as stated as the Listing Price in the Business Profile); at the end, she agreed to the price of $900,000.  Why did she agree to such price?  Li said that this was based on her estimate that she could recover the price by the profits to be made in about one year’s time. Her estimate that she could be able to do so was, in turn, based on the 2^nd Representation that, at that time, the profit of Maternia was $140,000 a month.

76.  Thirdly, as mentioned, under clause 6 of the Supplemental SPA, HKBA shall release 15% of the purchase price to Oliveiro if Li had a monthly transaction average of three containers and a profit margin of 5% in the first three months after the takeover; and HKBA shall release the remaining 15% to Oliveiro if the same targets could be reached in the 4^th to 6^th months after the takeover.  It is significant to note that in the draft Supplemental Agreement, the targets were initially stated to be four (not three) containers, and a profit margin of 6% (not 5%) a month.  Li explained that the initial suggestions of four containers and 6% profit margin a month were based on the Representations.  However, she was prepared to make some concessions after negotiations by reducing the number of containers by one, and also the profit margin by 1%, accepting that in the initial period after the takeover, the business may not be able to achieve the same results as those before the takeover.  As a result, in the final version of the Supplemental SPA, there were amendments in handwritten manuscript changing the number of containers from four to three, and the profit margin from 6% to 5%.  Oliveiro said that she did not know why Li made the initial suggestions of four containers and 6% profit margin in the draft Supplemental SPA.  It was most inherently improbable that Li would simply pluck some figures in the air.  It could not be a sheer coincidence that the initial suggestions made by Li matched exactly with the figures in the Representations.

77.  I accept the evidence of Li and Tsui on the three above‑mentioned points.  I take the view that they constitute compelling evidence that Li had actually relied on the Representations.  Even if I am wrong in holding that the burden is on Oliveiro to show that Li was not induced by the Representations, and that the burden is on Li to prove inducement or reliance, I would have come to the same conclusion in the light of the said evidence.

78.  Mr Yim submitted that Li was eager to close the deal and get the suppliers’ and customers’ information of Maternia so soon as possible so as to “catch the heat of the milk powder fever”.  Li admitted that, at that time, there was a high demand for formula milk powder products in Mainland China, and people were confident in Japanese products.  There is also evidence that Tsui was engaged in business of operating a pharmacy shop which sold, among other things, formula milk powders.  I agree that there might well be other practical or commercial reasons inducing Li to acquire Maternia’s business at that point of time, and to conclude the deal in a rather short time‑frame. However, as Lam JA (as he then was) held in Master Yield Ltd v Ho Foon Yung Anesis & Anor [2013] 6 HKC 520 at 527I, §26:

“ … It is well established that a representation need not be the sole inducement …”

79.  As mentioned, Oliveiro said that she had offered to postpone the completion date for the SPA as the updated financial statements were not yet available.  Apparently, her point is that it was Li’s own choice not to accept the offer; and had she accepted the offer, Li would and should have been able to verify the accuracies of the Representations.  Such point cannot assist Oliveiro.  First, by the time such an offer was made, Li had already signed the SPA.  Second, it is well established that it is no defence to an action for rescission that the representee might have discovered the falsity of the representation by the exercise of reasonable care (Welltech Investment Ltd v Easy Fair Industries Ltd [1996] 4 HKC 711 at 720; Green Park Properties Ltd v Dorku Ltd [2000] 2 HKLRD 400 at 410E–F).

80.  For the above reasons, I am satisfied that Li had relied on the Representations, and she was induced by them to enter into the SPA and Supplemental SPA.

H.  WHETHER THE REPRESENTATIONS WERE FALSE

81.  The burden of proof is on Li to prove that the Representations were false.  It is unnecessary for her to prove that each and every statement of fact in the Representations was false; she will succeed if she can prove that any one of them was false.

H1.  The 1^st Representation

82.  The 1^st Representation included a statement that Maternia had four major Japanese Suppliers.

83.  The documentary evidence only shows the names of two Japanese suppliers: FCS Corporation and Yoshida Takao Corporation.  Apart from the absence of documentary proof as to the identity of the two other Japanese suppliers, Oliveiro was not even able to recall their names.  On a balance of probabilities, I find that the 1^st Representation was false in this respect.

H2.  The 2^nd Representation

84.  The 2^nd Representation provided that Maternia had a monthly revenue of $2,300,000 with a profit margin of 6%, ie approximately $140,000.

85.  Mr Sung has referred me to numerous accounting and bank documents to show that the 2^nd Representation was wrong.  It is unnecessary for me to consider these documents in detail.  I shall focus on the key documents only.

86.  In respect of a limited company, in considering its financial position, I believe the starting point must always be the audited financial reports of that company.  I shall put aside Maternia’s audited financial report for the period from 7 January 2008 (the date of its incorporation) to 31 March 2009.  According to that report, Maternia had not yet commenced business during this period.

87.  What is highly material is the following information disclosed in the income statements in the audited financial reports of Maternia for the period ended 31 March 2010 and 31 March 2011:

	Turnover (HK$)	Gross profit (HK$)	Loss for the year (HK$)
Year ended 31 March 2010	1,773,890.00	143,804.00	23,284.00
Year ended 31 March 2011	3,851,473.00	349,214.00	190,769.00

88.  In respect of the audited financial report for the year ended 31 March 2010, the auditor expressed an unqualified opinion that it presented a true and correct view of the state of Maternia’s affairs as at 31 March 2010 according to the best of his information and explanations given to him, and as shown by the records of Maternia.  However, in respect of the audited financial report for the year ended 31 March 2011, the auditor was unable to form the same opinion.  This was because the auditor was unable to attend a physical count of stocks as at 31 March 2011 and there were no practicable alternative auditing procedure that he would apply to verify the quantities, existence and condition of the stocks.

89.  In respect of the period between 1 April 2011 and 1 August 2011, there were management accounts only.  For this period, the revenue was $9,367.30, the gross profit was $4,499.30 and the loss was $74,285.04.  Oliveiro explained that, because of the “3·11 Tohuku earthquake and tsunami” that took place in Japan on 11 March 2011, and the Fukushima nuclear disaster, Maternia had not been able to order any goods from its Japanese suppliers since around 17 March 2011 up to the time the SPA was concluded, and hence, there was little business for the period from April 2011.

90.  The figures shown in the said management accounts appear to match with the bank statements of Maternia’s account in The Hongkong and Shanghai Banking Corporation Limited (“HSBC”).  While Oliveiro stated in her 2^nd supplemental statement that Maternia had only one bank account in HSBC, she said in court that there were other accounts in Mainland China but she was unable to provide any particulars or documentary proof.  Nevertheless, the bank statements relating to the account in HSBC did not support the 2^nd Representation.

91.  On or about 4 July 2011, Wong had provided to HKBA a set of income statements for the period between May 2010 and May 2011. It is unnecessary for me to refer to the details of these statements.  Suffice to say that they did not support the 2^nd Representation.

92.  The undeniable fact is that the bank and accounting documents relating to Maternia did not support the 2^nd Representation. The explanation given by Oliveiro is that the documents did not reveal the full and complete picture because Maternia was engaged in parallel imports which very often involved cash transactions with no documentary record at all.  I take the view that her evidence in this respect cannot assist her for the following reasons:

(a) She mentioned in her 2^nd supplemental statement dated 26 June 2014 for the first time that most sale activities was conducted with Mainland China parallel importers who conducted business deals in cash only, and they suggested that no invoices were to be issued, no records were to be kept and no money from business transactions should be deposited into bank accounts.  However, in her supplemental statement dated 8 November 2013, she merely said that Li and HKBA were aware that it would take a long time to produce proper books of accounts and a proper calculation of profit because of the many cash transactions, especially with the parallel importers. She did not say that there was no record at all in respect of the parallel imports so that it would be impossible to prepare a proper and complete set of accounts.

(b) She said that she had told Li that the accounting records of Maternia would be incomplete in any event for the said reason.  Li denied that she had been so informed.  I prefer Li’s evidence in this respect.  On the evidence, the message conveyed to Li was that it would take time to prepare proper and accurate accounts but it was not an impossible task.

(c) Oliveiro stressed that parallel imports regarding the products sold by Maternia was lawful at that time.  It is unclear why the parallel importers demanded that there be no documentary records for the transactions.  And even if the parallel importers did not need or wish to have any documentary records, one would have thought that Oliveiro would make and keep some internal records of such transactions for her own purpose.

(d) Indeed, there were accounting records showing cash transactions.  Maternia’s internal accounts would include its petty cash positions.  Oliveiro also said that, to her knowledge, Wong would try her best to keep proper and complete records of Maternia’s business, though Wong might have made some careless mistakes.  Oliveiro mentioned that, sometimes, she would handle those cash transactions personally, and she might not have told Wong.

(e) Nevertheless, I have serious reservations whether it was true that the parallel import transactions were not recorded anywhere as alleged by Oliveiro.  But even assuming that it was true that some, or even all, of such transactions had not been recorded for the reasons claimed by Oliveiro, the reality is that Oliveiro is unable to say how much those transactions involved.  In other words, there is no positive evidence in this respect which can assist her to show that the 2^nd Representation was in fact true and accurate if one takes into account those transactions.

93.  What is most telling and conclusive is that Oliveiro admitted in court that the 2^nd Representation was untrue.  She said that it was possible and probably true that, in a particular month, Maternia had a turnover of $2,300,000, a profit margin of 6% and profits in the sum of $140,000.  In other words, these figures reflected the best scenario.  However, she admitted that it was impossible that Maternia achieved such results every month; those figures could not be the average monthly figures.  In her own words, the 2^nd Representation did not make sense.

94.  In view of Oliveiro’s said admission in court, Mr Yim, in his closing submissions, accepted that some content in the Representations was incorrect.  For the above reasons, I have no hesitation in concluding that both Representations were false.

I.  WHETHER THE REPRESENTATIONS WERE MADE FRAUDULENTLY

95.  Li claimed that the Representations were made fraudulently.

96.  In his closing submissions, Mr Sung submitted that HKBA made the Representations fraudulently, and because HKBA was acting as Oliveiro’s agent, Oliveiro was vicariously liable.  As I pointed out to Mr Sung, this is not the pleaded case of Li.  Her pleaded case is that Oliveiro, not HKBA, possessed the fraudulent state of mind.  The default judgment entered against HKBA was not based on any fraudulent state of mind on the part of HKBA.  The state of mind of HKBA is not an issue before me.  I am not in a position to make any finding on its state of mind in the circumstances.

97.  Mr Sung then submitted that, in any event, Oliveiro had the fraudulent state of mind and was guilty of fraudulent misrepresentations.  I decline to accept Mr Sung’s submissions in this respect for the following reasons:

(a) Fraud is a serious allegation.  Although the standard of proof remains to be on a balance of probabilities, I am reluctant to make such a serious finding against Oliveiro in the absence of clear and cogent evidence.

(b) Oliveiro said that she relied mainly on Wong to liaise with HKBA; information about Maternia was also provided by Wong to HKBA. Although she knew that a business profile would be produced, she insisted that she had not seen the Business Profile before the conclusion of the SPA.

(c) I am aware that Li and Tsui said that in the meeting in the afternoon on 19 July 2011, Oliveiro had said expressly that the content of the Business Profile was true and correct.  Oliveiro denied such allegation.  This meeting was apparently the only face‑to‑face meeting between Li and Oliveiro before the conclusion of the sale.  Sandy Li and Alex Ma of HKBA were also present on that occasion.  However, they have not given evidence.  In the absence of any credible and independent evidence, I do not feel able to tell whose version was more likely to be true.

(d) In the absence of any clear evidence that she actually knew the content of the Business Profile, in particular, the Representations, it is difficult to show that she had the fraudulent state of mind.

(e) Another important person who has not given evidence in this respect is Wong.  Oliveiro explained that she had tried to ask Wong to give evidence but Wong was reluctant to do so, and hence, she did not pursue the matter further.

(f) In the circumstances, in view of the rather unsatisfactory state of the evidence on this issue, I am not prepared to make a finding of fraud against Oliveiro unless it is strictly necessary for me to decide on this issue.  Insofar as the remedies sought by Li are concerned, I am unable to see why Li needs to prove that the Representations were made fraudulently.  Mr Sung has not been able to show any real need for me to decide on this issue.

98.  In my view, Li may simply reply on the common law and section 3 of the MO.

J.  LI’S ELECTION TO RESCIND THE SPA UPON DISCOVERING THE FALSITY OF THE REPRESENTATIONS

99.  Li claimed that she discovered the falsity of the Representations very shortly after she took over the business on 1 August 2011.  Hence, by the 12 August 2011 Letter, she rescinded the SPA (and the Supplemental SPA) through her solicitors.

100.  For reasons stated above, I am satisfied that, in these circumstances, Li was entitled to rescind the SPA (and the Supplemental SPA).  It is trite that the right to rescind does not depend on proof of fraud and is also available for even wholly innocent misrepresentations. As stated by Lord Herschell in Derry v Peek (1889) 14 App Cas 337 at 359:

“Where rescission is claimed it is only necessary to prove that there was misrepresentation; then, however honestly it may have been made, however free from blame the person who made it, the contract, having been obtained by misrepresentation, cannot stand.”

101.  Although the SPA had already been performed, and the shares in Maternia had already been transferred to Li by 12 August 2011, this was not a bar to rescission.  Section 2(b) of the MO provides that:

“Where a person has entered into a contract after a misrepresentation has been made to him, and‑

…

(b) the contract has been performed,

… then, if otherwise he would be entitled to rescind the contract without alleging fraud, he shall be so entitled, subject to the provisions of this Ordinance, notwithstanding the matters mentioned in [paragraph (b)].”

102.  No court order is necessary for rescission to take effect: the right to rescind the transaction is that of the representee, not the court; rescission is effected by an equivocal election by the respresentee which demonstrates clearly that he elects to rescind the contract and to be no longer bound by it (Cartwright, Misrepresentation, Mistake and Non‑disclosure (3^rd edn, 2012), §4‑18 at pp 121 – 122). I take the view that the 12 August 2011 Letter constituted an effective election by Li to rescind the SPA and the Supplemental SPA.

103.  I note that, in the 12 August 2011 Letter, Li’s solicitors did not explain in detail how Li had discovered that the Representations were untrue.  The solicitors also complained that Oliveiro had breached the agreements, and that they were void, on other grounds.  I also note that Li only obtained the audited financial reports of Maternia for the year ended 31 March 2011 after 26 September 2011 (which was after the 12 August 2011 Letter).  She now relies on this financial report and some other documents that she obtained after 12 August 2011 to support her claim that the Representations were false.

104.  In law, an election to rescind may be made by a letter issued by a solicitor, whether all of the stated grounds for rescission are later established or not; and there are authorities that a party electing to rescind may justify his action by reference to the true facts at the time the contract was entered into, and is not restricted to those matters advanced by or known to him when the election is made (O’Sullivan and others, The Law of Rescission (2^nd edn, 2014), §11.04 at p 235 and §11.10 at p 236).  Mr Yim has not suggested that, if Li was entitled to rescind the SPA and the Supplemental SPA, the 12 August 2011 Letter did not constitute a valid and effective election to rescind the agreements.

K.   REMEDIES GRANTED TO LI

105.  First, as Li had already elected to rescind the SPA and the Supplemental SPA by the 12 August 2011 Letter, it would be sufficient for me to grant a declaration that she had rescind those agreements lawfully.

106.  Second, in the 12 August 2011 Letter, Li asked for the return of the purchase price in the total sum of $900,000.  Upon rescission of the contract, in principle, the parties must each return to the other what they have received under the contract (Cartwright, Misrepresentation, Mistake and Non‑disclosure (3^rd edn, 2012), §4‑17 at p 119). I take the view that, in considering what remedies ought to be granted to Li in this respect, it is necessary to consider the sums of $630,000 and $270,000 separately:

(a) In respect of the sum of $630,000, Oliveiro is liable to repay the whole sum to Li.  I note Oliveiro’s evidence that she had only received $550,000 and that $80,000 had been deducted by HKBA as agency fee.  However, the deduction of the $80,000 was a matter between her and HKBA.

(b) In respect of the sum of $270,000, the provisional liquidators of HKBA are stilling holding this sum as stakeholder.  I take the view that it should be sufficient for me to make an order that Li and Oliveiro shall issue a joint instruction to the provisional liquidators to direct it to release this sum to Li.  As HKBA’s provisional liquidators are merely holding this sum as stakeholder, I am unable to see any legal basis for them to deduct any part of the said sum as their costs or expenses.  I would have thought that if they wish to do so, they would need to provide the legal basis.  Nevertheless, HKBA’s provisional liquidators are not before me.  And I shall include a liberty to apply provision in case the parties encounter any difficulty in seeking repayment of this sum from HKBA’s provisional liquidators.

107.  In the 12 August 2011 Letter, Li also asked for an indemnity for the sum of $68,000 which had been paid to HKBA as service fees.  In addition to this sum, as set out in a document entitled “P’s Damages” dated 8 March 2016, the parties have agreed that Li has suffered loss and damage in the net sum of $56,519.94.  It is unnecessary for me to set out the particulars here.  Suffice to say that they were concerned with payments made to third parties such as Maternia’s employees, landlord, etc, in order to discharge Maternia’s legal obligations.  There are two legal bases to explain why Li is entitled to claim this sum from Oliveiro.  First, the common law allows a representee to claim an indemnity to compensate him for the obligations undertaken or expenditure incurred in favour of third parties under the contract which is rescinded, although the scope of the indemnity is not entirely clear (Cartwright, Misrepresentation, Mistake and Non‑disclosure (3^rd edn, 2012), §4‑17 at pp 119 – 120; O’Sullivan and others, The Law of Rescission (2^nd edn, 2014), §§17.23 – 17.29 at pp 354 – 356).  Second, she is entitled to claim damages under section 3(1) of the MO (Cartwright, supra, §4‑17 at pp 120 – 121).  As mentioned, Mr Yim agreed that Li is entitled to claim this sum of money.

108.  In his closing submissions, Mr Sung also invited me to make the following orders:

(a) The Form D2A filed on behalf of Maternia into the Companies Registry on 1 August 2011 be expunged from the records of the Companies Registry.  This was a notification of the resignation of Sinoyouth Corporate Services Ltd as secretary and Kam as director on the one hand, and the appointment of Tsui as secretary and Li as director on the other hand, with effect from 1 August 2011.

(b) The Instrument of Transfer executed between Li and Oliveiro on 1 August 2011 be cancelled.

109.  I take the view that Mr Sung’s request for such orders is misconceived:

(a) I cannot see how a notification to the Companies Registry about the resignation and appointment of secretary and director can be expunged.  The resignations and appointments were clearly effective as a matter of law.

(b) In law, the fact that a contract was induced by misrepresentation does not prevent the transfer of legal property rights in the subject matter transferred pursuant to the voidable contract (Cartwright, supra, §4‑10 at p 108). Hence, the transfer of the shares in Maternia on 1 August 2011 was valid, and cannot be cancelled.  Upon Li’s election to rescind the SPA and the Supplemental SPA on 12 August 2011, the legal position should be that as explained in Cartwright, Misrepresentation, Mistake and Non-disclosure (3^rd edn, 2012), §4‑11 at pp 111 – 112 as follows:

“At the moment that rescission takes effect the obligations created by the contract are avoided. The representee immediately regains those legal and equitable property rights that can be revested without further formality, but if the nature of the property is such that a revesting of the legal title requires a particular formality, such as where land or shares have been transferred pursuant to a voidable contract, the representor holds the legal title on constructive trust for the representee.”

Accordingly, as from the time Li elected to rescind the SPA on 12 August 2011, Li had been holding the shares in Maternia on such constructive trust for Oliveiro.

110.  After the completion of the oral closing submission, I invited parties to file written submissions to address me further on this point.  Mr Sung submitted a “Submissions on Court’s Jurisdiction to rectify/remove documents from the Companies Registry” dated 9 March 2016 whereas Mr Yim elected not to make any further submissions.  Mr Sung’s submissions revealed a fact unknown to me, and probably unknown to the parties, previously: on 24 April 2015, the name of Maternia has been struck off the Companies Register and Maternia was accordingly dissolved pursuant to section 746(2) of the Companies Ordinance (Cap 622) (“the CO”).  Mr Sung asked me to make an order to compel Oliveiro to make an application under section 765 of the CO to restore Maternia to the Companies Register so that the information contained in the Form D2A dated 11 August 2011 can be rectified.

111.  I must say that I was taken by surprise by the fact revealed in Mr Sung’s submissions.  I would have thought that the dissolution of Maternia, which took place in April 2015, was a material fact that both parties should be aware of and bring to the attention of the court much earlier.  The fact that it was only discovered on 8 March 2016 indicates that neither party is now interested in the company at all.  In practice, Maternia has ceased operation for a long time.  In principle, Li ought to have returned the shares in Maternia to Oliveiro.  While this would be possible after she elected to rescind the SPA up to 23 April 2015, it was no longer possible and meaningful to do so after 24 April 2015 upon the dissolution of Maternia.  Mr Yim has not made any submissions in reply to Mr Sung’s latest submissions.  Oliveiro has not pleaded impossibility of restitution as a defence; and there is no evidence that, in practice, she wants to have the shares in Maternia returned to her.  On the other hand, I fail to see any practical reason why it is now necessary to rectify the Form D2A, and I doubt whether there is any valid ground to rectify the document pursuant to section 42 of the CO as suggested by Mr Sung.  In the circumstances, I am not convinced that I should make any order to compel Oliveiro to apply to restore Maternia to the Companies Register in order to facilitate the making of an application under section 42 of the CO.

112.  I should add that I cannot see what material prejudice Li will suffer in practice as a result of my refusal to make the orders as proposed by Mr Sung.  As Maternia has been dissolved, she will not incur any further liability as shareholder or director.  As to liability that she has incurred as shareholder or director before the dissolution of Maternia, as stated above, I have awarded her damages in relation to the costs and expenses that she had incurred as claimed.  There is no suggestion that she has incurred any other liability not covered by the claims that she had made.

L.  OLIVEIRO’S COUNTERCLAIM

113.  As mentioned, Oliveiro counterclaimed mainly for the sum of $270,000.  She also counterclaimed for a small sum of $12,130 which she had paid to satisfy an award made by the Small Claims Tribunal against her and Maternia in relation to the failure to pay the hire‑purchase fees for a photocopier of Maternia.  She also claimed damages to be assessed.

114.  Mr Yim has not made any submissions on the counterclaim.  Nevertheless, in view of my conclusion that Li succeeds in her action, it must follow that Oliveiro’s counterclaim shall be dismissed.

M.  CONCLUSION

115.  For the above reasons, I shall make the following orders:

(a) a declaration that the plaintiff has lawfully rescinded the SPA and the Supplemental SPA (as defined above);

(b) the 1^st defendant do pay the plaintiff the sum of $754,519.94;

(c) the plaintiff and the 1^st defendant do, within 28 days of this judgment, issue a joint written instruction to the provisional liquidators of the 2^nd defendant to direct them to return the sum of $270,000 held by them as stakeholder pursuant to the Supplemental SPA to the plaintiff forthwith;

(d) the 1^st defendant do pay the plaintiff interest on the said total sum of $1,024,519.94 at 1% over the prevailing prime lending rate of HSBC from the date of writ (ie 27 March 2012) to the date of judgment and thereafter at the judgment rate until payment (or any part thereof);

(e) the 1^st defendant’s counterclaim be dismissed; and

(f) liberty to apply.

116.  The sum of $754,519.94 is the total sum of $630,000, $68,000 and $56,519.94 considered above.  I have decided to award interest on the total sum that ought to be paid or returned to Li at the commercial rate (ie 1% above the prevailing prime lending rate of HSBC) from the date of writ until judgment, and thereafter at the judgment rate until payment.

117.  As to costs, Mr Yim submitted that, firstly, there should be no order as to costs; and secondly, if any costs are awarded to Li, they should be taxed on the District Court scale only.

118.  I shall deal with the second point first. As the amount at stake is more than $1,000,000, I cannot see any reason to award costs to Li on the District Court scale only.  As to the first point, Mr Yim submitted that no costs should be awarded to Li considering her conduct of her case.  In his closing submissions, he submitted that, alternatively, Li should be deprived of 60% of her costs.  Mr Sung, on the other hand, submitted that Li should not be deprived of any of her costs.

119.  I agree that since the introduction of Order 62, rule 5, in particular rule 5(2), under the Civil Justice Reform, the courts are more ready to depart from the starting point of costs following the event (Chan Shun Kei v Hong Kong Construction (Hong Kong) Ltd, CACV 192/2014 (7 March 2016, unreported), §24).  The court has a wide and unfettered discretion to deprive a successful party part of his costs because of his conduct.  However, such discretion must be exercised judicially and cautiously.  A successful party may be deprived some of his costs if he failed on some of the issues, or on account of lack of utility of some of the evidence (CLP Power Hong Kong Ltd v Commissioner of Rating and Valuation, HCMP 3207/2015 (14 March 2016, unreported), §5).

120.  The gist of Mr Yim’s submissions is that Li had made allegations, in particular, for breach of contract, which were not pursued.  Mr Sung submitted that in the statement of claim, there were only three paragraphs concerning such allegations (ie §§16 – 18).  I have read the pleadings, the witness statements and the documents again in order to decide how I should exercise my discretion on costs.  While it seems correct that only a few paragraphs in the statement of claim were concerned with Li’s claim for breach of contract (which she had abandoned), I note that in the Reply, the witness statements and the documentary evidence, there were substantial references to events that took place after 1 August 2011 which were apparently relevant to such claim.  I appreciate that Li and Tsui were giving a narrative account of the events in a chronological order, and therefore, it may be inevitable that they would touch upon events after 1 August 2011 in any event.  However, some evidence concerning the disputes between the parties about the handover of the business was not relevant to her claim in misrepresentation at all.  On the other hand, Mr Sung made it clear in his written opening submissions that he would only pursue the claim in misrepresentation; and hence, no time and costs had been spent at the hearing of this trial on the claim for breach of contract which had been abandoned.  In respect of her claim in misrepresentation, the only substantial point that I have not accepted is that Oliveiro was guilty of fraud.  I must of course bear in mind that Li is the successful party.

121.  All in all, I agree that Li should be deprived of some of her costs to reflect that the fact that she had abandoned her claim for breach of contract, and that some of the evidence she adduced was useless.  However, in my view, only a small proportion of her costs should be deprived on such grounds.  Mr Yim merely made rather bold submissions in this respect without any detailed analysis as to why Li should be deprived of 60%, let alone, all of her costs.  Adopting a broad brush approach having regard to all relevant circumstances, I shall deprive Li 10% of her costs.

122.  Of course, Oliveiro shall only be liable to pay the costs of Li’s action against her, but not those relating exclusively to Li’s claim against HKBA.  I appreciate that some of the costs incurred as against Oliveiro and HKBA would overlap, and Li would have to incur the same amount irrespective of whether she sued Oliveiro only, or both defendants.  Li should be entitled to recover such common costs jointly and severally from Oliveiro and HKBA.  It would be a matter of taxation to determine how much Oliveiro shall pay as costs to Li.

123.  Accordingly, I shall make a costs order nisi that the 1^st defendant do pay 90% of the costs of the plaintiff in this action against the 1^st defendant.  This costs order shall bear the meaning as I explained above.  It will become absolute unless any party makes further submissions on costs within 14 days after this judgment is handed down (in such event, I shall dispose of the issue on costs on papers).  Such further submissions should be confined to matters that had not been argued before me.