TERKILD JOHAN TERKILDSEN AND ANOTHER v. BARBER ASIA LTD AND OTHERS

Date of Hearing:  8 October 2009

Date of Handing Down Decision:  30 October 2009

Date of Hearing:  1 June 2007

Date of Handing Down of Ruling:  6 June 2007

___________

R U L I N G

___________

Background:

1.  The factual circumstances in which the issue now before me arose may be found in the judgement delivered by me in this matter on 8 March 2007, where I had to consider an application by the plaintiffs to amend the statement of claim, and a counter application by various defendants to strike out the statement of claim.

2.  The writ was issued in May 2003, and was served on Mr Elliott.  On 18 November 2003, Mr Elliott filed a defence.  When the summons to amend the statement of claim was filed, the draft amended statement of claim contained no allegations at all against Mr Elliott.  The plaintiffs accept that that effectively constituted a discontinuance against Mr Elliott. 

3.  But no discontinuance was filed.  On 11 January 2007, Mr Elliott issued a summons for an order for discontinuance and costs.  The plaintiffs acceded to the order for discontinuance but wished to argue the question of costs. The question of costs was adjourned for discussion between solicitors, and argument if there could be no agreement.

4.  No agreement has been reached on the question of costs, and the matter came before me for argument on 1 June 2007.  Having heard the parties, I ordered that the plaintiffs must pay Mr Elliott’s costs in the proceedings, together with the costs of the argument on 1 June 2007, all cost to be taxed on a party and party basis.  I now give my reasons for that decision.

The argument for the plaintiffs:

5.  Mr Bedford argues that the plaintiffs were not wrong to commence proceedings against Mr Elliott, relying upon a letter dated 16 March 2001, which, Mr Bedford says, gives a misleading impression that Mr Elliott was more knowledgeable about, and more intimately involved in the management of ISG in 1998, when the plaintiffs lost their funds, than has subsequently transpired.  Mr Bedford contends that the defence filed by Mr Elliott was a bare denial, and that following the completion of discovery in June 2005, when it became apparent to plaintiffs that they could not succeed against Mr Elliott, the matter proceeded no further against him.

The law:

6.  Under O 21 r 2 a plaintiff may discontinue an action without leave, at any time not later than 14 days after the service of the defence.  Where the discontinuance is under this rule, then under O 62 r 10, the defendant is entitled, without further order, to tax his costs of the action, and if those costs are not paid within four days after taxation, to sign judgement for the costs.

7.  However, once that period of 14 days after service of the defence has passed, leave is required to discontinue, and the grant of leave may be on such terms as to costs, the bringing of a subsequent action, or otherwise as the Court thinks fit: O 21 r 3.

8.  The general rule is that a defendant is entitled to costs when an action is discontinued: see Inchroy Credit Corporation Ltd v Cheung Man-cheung [1992] 1 HKLR 120, and Trend Publishing (HK) Ltd v Vivien Chan & Co (a firm) [1996] 2 HKLR 227.  That general rule will be applied where the discontinuance constitutes a recognition by the plaintiff of likely defeat.

9.  But it is right that the court has a discretion in the matter of costs, a discretion which will enable the court to do justice between the parties: see Inchroy Credit at 122 l 38 –123 l 43 and Trend Publishing at 436D-437A.  For an example of the discretion being exercised see Leung Yuet Ching v Leung Yuet Kuen [2001] 4 HKC 562.

Discussion:

10.  The circumstances in which the plaintiffs funds were lost occurred between October 1997 and May 1998.  At the time of the issue of the writ in May 2003, the only evidence apparently available to the plaintiffs, pointing to the involvement of Mr Elliott in the loss of the funds, was a letter dated 16 March 2001. 

11.  That letter is a letter signed by Mr Elliott, on the letterhead of a company called Exemplar Holdings PLC Ltd, in which Mr Elliott says that he “provide(s) company secretarial services for ISG”.  The letter says that as a result of providing those services, he was familiar with other investors.  The letter then proceeded to set out a number of points, generally in favour of the defendants, in respect of the circumstances in which the investors funds were lost.  While the letter demonstrates apparent knowledge on the part of Mr Elliott of the circumstances, there is nothing in the letter to indicate that he personally was involved in the transactions during the relevant period.

12.  Discovery was apparently not completed until 2005.  Discovered amongst the relevant documents were two invoices from a firm called East Asia Corporate Services (BVI) Ltd, addressed to ISG, and marked for the attention of Mr Elliott.  One, dated 24 March 1998, is for the sum of US$150 relating to the issuance of a Certificate of Good Standing issued to a Mr Barber, the other dated 28 December 1998, for US$60, is for the re-ordering of a company seal, presumably for ISG.

13.  The plaintiffs have no other evidence which points to the involvement of Mr Elliott in the activities resulting in loss of their funds.  Consequently they have elected to discontinue the claim against him.

14.  Mr Bedford says that by writing the letter dated 16 March 2001, Mr Elliott “allowed himself to be the mouthpiece of the directors of ISG and gave the misleading impression that he was more knowledgeable about, and more intimately involved, in the management of ISG in 1998, when the plaintiffs lost their funds”. 

15.  Having considered the letter, I have formed the view that the inferences sought to be drawn by Mr Bedford are not sufficient to justify the issue of proceedings of the nature in this case, against Mr Elliot.  While a person may be aware of the activities of the directors of a company to whom he provides secretarial services, it does not follow that that person is a participant in those activities.  Rather than indicating an intimate involvement in the management of ISG in 1988, in my view, the letter tends to indicate a survey of circumstances after the event, culminating in a view being taken of those circumstances, by the writer of the letter.

16.  I do not accept the submission that the defence filed by Mr Elliott was a bare denial.  In response to an allegation that Mr Elliott had acted as “a shadow director or as the company secretary of ISG”, there was a specific denial.  Further, it was specifically pleaded by Mr Elliott that he only became a director of ISG in April 2003.  In the light of these pleadings the plaintiffs ought to have considered their position in relation to Mr Elliott promptly, and determined much earlier than July 2006, to amend the statement of claim, effectively discontinuing against Mr Elliott.

17.  In my view there was simply no sufficient basis upon which Mr Elliott should have been joined in the proceedings.  I appreciate that the writ was issued close to the expiry of the limitation period, but that was a matter in the hands of the plaintiffs.  Mr Bedford was obliged to acknowledge that the plaintiffs knew their funds had been lost as long ago as June 1998.  No reason has been given to me why the writ could not have been issued earlier, and discovery completed.  If the writ had been issued in good time, and discovery completed, revealing a proper justification for proceedings against Mr Elliott, he could have been joined as a party with no concern for limitation provisions.

18.  In my view it would be quite wrong to refuse Mr Elliott his costs.  To do so would be tantamount to permitting a plaintiff to issue a writ on the flimsiest of bases, and then, upon mature reflection, to escape by discontinuance, without any penalty as to costs.  In the present case the discontinuance is nothing more and nothing less than a plain acknowledgement by the plaintiffs of likely defeat.  The fact that the plaintiffs may have believed at the time they issued a writ that they were justified in suing Mr Elliott is irrelevant.  As a consequence of that belief, a belief that is now completely abandoned, Mr Elliott has been put to expense and should be compensated.

19.  For these reasons I ordered that the plaintiffs must pay Mr Elliott’s costs on the discontinuance and on the argument as to costs, all costs to be taxed on the party and party basis.

Dates of Hearing : 4 May 2007

Date of Handing Ruling : 31 May 2007

Date of Hearing : 23 March 2007

Date of Handing Ruling : 27 March 2007

Date of Hearing : 23 March 2007

Date of Handing Down of Judgment : 27 March 2007

Dates of Hearing:  15 – 19 January 2007

Date of Handing Down of Judgment:  8 March 2007

______________

J U D G M E N T

______________

Introduction:

1.  The events which gave rise to these proceedings occurred between October 1997 and May 1998.  The proceedings were commenced 4 years later, in May 2003.  I am told that discovery was completed in June 2005.  Now, nearly 9 years after the events, and nearly 4 years after the commencement of the proceedings, the 2^nd, 3^rd, 4^th, 5^th, and 7^th defendants seek to strike out the pleadings, pursuant to O 18 R 19(1), on the grounds that the pleadings do not disclose any reasonable cause of action.

2.  The plaintiffs counter that application by an application to amend the pleadings, amendments which they say save the pleadings.  A draft amended statement of claim has been filed.

3.  The 1st defendant, although having been served, and having filed a statement of defence, takes no part in the proceedings now before me.  The 6th, 8th and 9th defendants are no longer involved in the proceedings, the claims against them having been struck out.

4.  The statement of claim, as amended, is said to comprise no less than eight different causes of action against some or all of the six remaining defendants.  References to paragraph numbers in this judgment references to the paragraph numbers in the draft amended statement of claim.  Where appropriate I shall indicate whether or not the pleadings contained in the draft amended statement of claim were included in the original statement of claim.

5.  In relation to a number of the different causes of action, some paragraphs have been added to the draft amended statement of claim, and in some existing paragraphs, references to defendants, not previously referred to in that paragraph, have also been added.  In various places paragraphs have been amended by the addition of further words or sentences.

6.  I am satisfied that the proper way to approach the matter is to consider each cause of action, separately, against each defendant.  That is an exercise that will require examining first whether the pleading, as amended, is sufficient to disclose a reasonable cause of action, and, if it is sufficient, to then consider whether the survival of the cause of action is dependent upon an amendment.  If the survival of the cause of action is dependent upon an amendment it will then be necessary to consider any limitation issue that arises.  That latter exercise will require a consideration of O 20 R 5, and s 35 Limitation Ordinance Cap 347.

7.  In the course of argument Mr Bedford, for the plaintiffs, read to me a number of passages from the notes to O 18 R 19 in Hong Kong Civil Procedure 2007, setting out the principles to be applied.  I have applied those principles in dealing with this matter. 

8.  In considering the matter I bear in mind that the fact that the statement of claim may be in-elegantly pleaded, and not pleaded in the way in which I might have drawn the document myself, is not a basis to strike it out.  If I can make some sense of the pleading, I will do so, notwithstanding the fact that the pleading may not be entirely logically set out.

9.  It is appropriate that I should record that Mr Bedford was not responsible for the original pleading.

The limitation issue:

10.  A significant issue raised by these proceedings is the limitation issue.  The issue arises because steps are being taken to amend the pleadings well after the expiry of the six year limitation period since the events, the subject of the proceedings, occurred.

11.  In considering this issue it is appropriate to set out the following passage from Hong Kong Civil Procedure 2007, Vol 1, para 20/8/7:

“The principle underlying the powers of the court under O 20 R 5, it is that if the proceedings had been, from the beginning, properly formulated or constituted in the circumstances specified in paras (3), (4), and (5), the defence of limitation would not have been available to the defendant; and accordingly, if in its discretion, the court thinks it just to grant leave to amend defects in the pleading within the scope of the circumstances specified in those paragraphs so that such defects in the proceedings are treated as having been cured ab initio, the defendant is not being deprived of the benefit of a defence which he would not have had if the proceedings had been so properly formulated all constituted in the first place.”

12.  The submission made by Mr Bedford was that so long as a defendant had been named in respect of one cause of action, within the limitation period, another cause of action could be pleaded against him, outside the limitation period, even if that additional cause of action required the pleading of new facts.  I am satisfied that is an incorrect interpretation of the effect of s 35 Limitation Ordinance and O 20 R 5. 

13.  The effect of those provisions is that where it is necessary to plead facts to support a whole new cause of action, or to plead new or additional facts to substantiate a cause of action against a defendant, already a party to the proceedings, and it is sought to plead those new or additional facts outside the limitation period, the amendment may not be permitted.  If however the essential facts required to substantiate an un-pleaded cause of action, are pleaded against a defendant in relation to another cause of action, in the discretion of court, amendment may be made to introduce the un-pleaded cause of action.

Pleading tantamount to fraud:

14.  In the course of argument Mr Bedford accepted that a number of paragraphs containing expressions such as: “fraudulent or reckless or negligent misrepresentation”, or “false, misleading or deceptive”, or similar expressions, constituted rolled up pleas of fraud and negligence, which were bad: see Belmont Finance Corporation v Williams Furniture [1979] Ch 250.  Mr Bedford conceded that the claim could not be couched in terms of fraud or recklessness.  He accepted also that it was a necessary consequence of that concession that all such expressions should be amended to be restricted to allegations of negligence.

15.  Mr Smith contended that if bad, the whole plea must go, with the inevitable consequence that the plea of negligence must go.  The submission relied upon the decision in Paragon Finance Plc v D B Thakerer & Co [1999] 1 All ER 400.  That case makes it clear that an amendment which sought to make a new allegation of intentional wrongdoing, where previously no intentional wrongdoing had been alleged, constituted the introduction of a new cause of action, since intentional and unintentional wrongdoing gave rise to distinct causes of action.  Leave to amend was refused in that case.

16.  I have considered the decision and submissions carefully and have concluded that the converse does not apply.  And unintentional act is comprised in an allegation of an intentional act, for the actor may say in response to the plea: “Yes I did the act, but I did not intend to do it, nor did I intend the consequences of the act”.  A plea of an unintentional act however may only be met by a denial, and not an assertion that the act was done intentionally.  In simple terms I am satisfied that the greater includes the lesser.  Paragon Finance was a case of the lesser not including the greater.

17.  Mr Bedford accepts that he must make appropriate amendments, pleading only unintentional acts.

Background Facts:

18.  The facts that I now set out are the facts alleged against the defendants in the draft amended statement of claim.  Although they are mere allegations at this stage the court is required to look at the pleading without extrinsic evidence, and to decide, whether, on the assumption that the facts as pleaded are true, the pleading discloses a cause of action.

19.  Barber Asia was, at all relevant times, a company registered as a corporate investment adviser under the Securities Ordinance Cap 333, and a “registered person”, registered as an “Investment Adviser” under the Securities and Futures Commission Ordinance, Cap 24.  Mr Christopher Barber and Mr Andrew Barber were also “registered persons”, and were personally registered under the Securities Ordinance as “Investment Adviser’s Representatives”.

20.  At all material times Mr Andrew Barber and Mr Dunford were directors of Barber Asia.  From 18 June 1998, Mr Dunford was also the company secretary to Barber Asia.  At all material times Mr Christopher Barber was an employee of Barber Asia.  He became a director of Barber Asia on 30 October 1998.  Mr Clark was not a director of Barber Asia.

21.  International Strategies Group, (ISG), is a BVI company, of which Mr Christopher Barber and Mr Clark were, at all relevant times directors.  ISG is fully owned and operated by Barber Asia.  Essentially ISG was a special-purpose vehicle used for the purpose of pooling money from different parties, including the plaintiffs, who intended placing money in a particular investment.

22.  Mr Clark’s principal occupation was that of a solicitor, employed in 1997 and 1998, as a consultant to the Hong Kong solicitors firm of Horvath & Giles.

23.  As a result of advice given by Mr Christopher Barber, in his capacity as a director of Barber Asia, at a meeting, in about October 1997, when Mr Clark was said to be present, the Plaintiffs became interested in investing in an investment scheme known as a “Fully Secured Leverage Program”, (FSLP).  The FSLP involved the leveraged trading of assets such as US Treasury bills or bank debenture instruments from less than face value and reselling those instruments at high profit.  The plaintiffs say they were told that their funds would never be put at risk, that profits of at least 100% would be made within a period of six months, and that the FSLP was controlled by the US Federal Reserve.

24.  The plaintiffs were informed that for tax reasons FSLP investments must be made by an overseas registered company, in this case ISG.  After the initial meeting in about October 1997, when the FSLP was first introduced to the plaintiffs, discussions concerning the investment continued.  In particular by a letter dated 31 October 1997, on the letterhead of ISG, signed by Mr Christopher Barber, the plaintiffs were informed that there would be a Barclays Bank guarantee to 108% of the principal sum invested.  This assertion was later varied to constitute a “bank guarantee from one of the top 25 banks”.

25.  On 31 October 1997, Mr Mortensen transferred the sum of US$500,000 to an account of ISG held at the London Branch of the Bank of East Asia.  The transfer was for the purpose of investment in the FSLP.  On 16 January 1998, Mr Terkildsen transferred the sum of US$750,000, which had been advanced to him by Royal Skandia Life Assurance Ltd, to the same bank account.  Again, the transfer was for the purpose of investment in the FSLP.

26.  The funds were not immediately invested in the FSLP, but remained in the account of ISG.  Apparently steps were still required to establish the FSLP, before the plaintiffs’ funds could be invested.

27.  In the meantime, on 10 March 1998, on the letterhead of Barber Asia, Mr Andrew Barber wrote a memorandum to a Mr Ben Beaumont, a barrister formerly practising in Hong Kong.  The memorandum recorded a concern that the FSLP was a “scam”, together with other concerns.  The plaintiffs were not informed of the concerns that were raised in this memorandum.

28.  About 6 May 1998, Mr Christopher Barber, acting on behalf of ISG, became a signatory to a bank account at the Brussels branch of ABN-Amro Bank in the name of “Corporation of the BankHouse Syndicate No 165”, (BankHouse).  It was this entity which was intended to hold the funds invested in the FSLP. 

29.  On about 12 May 1998, Mr Christopher Barber, notwithstanding the concerns that had been expressed in the 10 March 1998 memorandum, authorised the transfer, from ISG’s account at the London branch of the Bank of East Asia, to the BankHouse account in Brussels, the sum of US$4,000,100, which sum included the funds contributed by the plaintiffs.

30.  On 29 May 1998, without any guarantee from any bank being in place, or any undertaking having been received from any merchant bank, Mr Christopher Barber, acting on behalf of ISG, authorised the transfer of US$4 million, including the plaintiffs funds, from the Brussels BankHouse account, to another bank account held by BankHouse at the Brussels branch of ABN-Amro bank.

31.  The funds were never invested in an FSLP.  Of the sum of US$4 million transferred on 29 May 1998, some US$2.8 million were transferred to the accounts of various individuals, amongst which has been identified as sum of US$237,000 to Mr Clark.  It is said that £200,000 was received by Barber Asia from ISG on about 3 September 1998.  Some repayments have been made to the plaintiffs but a substantial amount remains missing.

The causes of action pleaded:

32.  In these circumstances the plaintiffs sued the various defendants seeking to recover their losses, which, with accrued interest, I am told now exceed US$5 million.

33.  Mr Bedford contended for eight different causes of action, relating each one to the nine prayers for relief in the statement of claim.  They are:

(i)      Negligent misrepresentation; i.e. liability under the principles in Hedley Byrne v Heller & Partners [1964] AC 465; all defendants; (prayer 1);

(ii)     Negligent misrepresentation pursuant to the statutory tort created by s 8 Protection of Investors Ordinance Cap 335; all defendants; (prayer 2);

(iii)    Negligent act or omission: i.e. extended Hedley Byrne liability for a negligent act or omission: see Henderson v Merrett Syndicates Ltd [1995] 2 AC 145 HL; all defendants; (prayer 3);

(iv)    Breach of contract; Barber Asia, Mr Christopher Barber and Mr Andrew Barber; (prayer 4);

(v)     Professional negligence, i.e. breach of the duties arising from the “Code of Conduct for Persons Registered with the Securities and Futures Commission, March 1996”; Barber Asia, Mr Christopher Barber and Mr Andrew Barber; (prayer 5);

(vi)    Breach of Trust; ISG and Mr Christopher Barber; (prayer 6);

(vii)   Money Had and Received; ISG; (this claim combines prayers 7 and 8);

(viii)  Tracing claim, consequent upon a constructive trust and/or unjust enrichment; Mr Christopher Barber, Mr Andrew Barber, Mr Clark, Mr Dunford; (prayer 9).

Negligent Misrepresentation; Hedley Byrne liability:

34.  The elements of the tort of negligent misrepresentation under the principles in Hedley Byrne are now well-known.  Together with the usual requirements to establish the tort of negligence, that is, that the defendant owed the plaintiff a duty of care, that the defendant was in breach of that duty, that the plaintiff suffered a loss in consequence of that breach, and that such losses are of a kind for which the law recognizes the right to be compensated by the defendant, the plaintiff must establish a special relationship between the parties to justify a duty. 

35.  In Henderson, (supra), the governing principle of Hedley Byrne was identified as being an assumption of responsibility by the defendant along with reliance by the plaintiff.  That assumption of responsibility may be by overt acts or words, but may be implied from the nature of the relationship.

36.  The statement of claim, either in its original form, or its amended form, does not contain, as it ought to, a clear and specific plea, setting out the facts upon which the plaintiffs intend to rely, that a special relationship existed. 

37.  The statement of claim, in both forms, does however plead that legal duties were owed by Barber Asia, Mr Christopher Barber, Mr Andrew Barber, and Mr Dunford, as fiduciaries, (para 4).  The duties are alleged to be owed to all persons to whom they held themselves out as financial advisers and to whom they purported to give financial advice.

38.  By amendment, the draft amended statement of claim, (para 3), pleads particular duties on the part of Mr Andrew Barber and Mr Dunford in their capacity as directors of Barber Asia.  This plea was originally made against Mr Dunford, but the addition of Mr Andrew Barber to this clause comes with the amendment.  In paragraph 5, plainly referring to both paragraphs 3 and 4, both versions of the statement of claim set out particular duties alleged to be comprised in the fiduciary duties pleaded on the part of the various defendants.

39.  As Lord Browne-Wilkinson notes in his judgement in Henderson at p 206 A-B, the use of the expression “fiduciary duties” in the context of Hedley Byrne liability is dangerous.  If Hedley Byrne liability is to be pleaded, it ought to be pleaded clearly and precisely and not indirectly through the medium of expressions such as “fiduciaries duties”.  But that said, it is sufficient to describe Hedley Byrne liability as being of the nature of a fiduciary duty.

40.  That Hedley Byrne liability may arise in respect of the giving of financial advice is, I am satisfied, now so clear at law, that I have concluded that the pleading is sufficient to constitute a plea of a special relationship.  It is abundantly clear that financial advisers hold themselves out as possessing a special expertise to advise persons on the suitability of financial investments.  A financial adviser must know that a person seeking their advice places implicit reliance on that expertise when they accept the advice and give to the adviser funds to be invested.

41.  I find a direct parallel between the circumstances of a financial adviser and the managing agents of Lloyd’s syndicates advising Names, as described in the leading judgement in Henderson, per Lord Goff at 182 D-G.

42.  Mr Bedford seeks to mount this claim against all defendants.  While a general assertion as to the special relationship is made, it is necessary to examine the facts alleged against each defendant.

(a)     Barber Asia:

43.  Barber Asia did not take part in the proceedings before me.  The facts alleged against Barber Asia are sufficient to substantiate Mr Bedford’s assertion that the statement of claim discloses a reasonable cause of action against the company in Hedley Byrne liability.

(b)     ISG:

44.  There is no appropriate pleading that any fiduciary duty was owned by ISG to the Plaintiffs.  The pleas in relation to fiduciary duties have been carefully confined to the individuals and to Barber Asia.  The only duty pleaded against ISG is that of a statutory duty under the Protection of Investors Ordinance Cap 335, contained in paragraphs 6 of the statement of claim.

45.  In so far as the draft amended statement of claim purports to be a claim against ISG in Hedley Byrne liability, it discloses no reasonable cause of action against that company, and to that extent is struck out.

(c)     Mr Christopher Barber:

46.  In both versions of the statement of claim there are sufficient pleas that Mr Christopher Barber owed appropriate fiduciary duties to the Plaintiffs, and sufficient pleas of the manner in which those duties have allegedly been breached, that I am satisfied that the statement of claim discloses a reasonable cause of action against him in Hedley Byrne liability.

47.  In reaching this conclusion I do not disregard the decision in Williams v Natural Life Ltd [1998] 1 WLR 831.  That was a case involving assertions by a company director in a brochure which allegedly persuaded the plaintiffs to enter into a franchise agreement with the company.  The plaintiffs did not deal directly with the company director at all, neither did they seek or accept any particular advice from him. 

48.  Those circumstances are a long way removed from the circumstances in the present case, where Mr Christopher Barber is alleged to have held himself out as being capable of giving financial advice to clients through the medium of their company Barber Asia Ltd.  There are direct allegations of the advice being given to the plaintiffs by Mr Christopher Barber.

Mr Andrew Barber:

49.  The giving of advice is an essential element of the tort comprised in Hedley Byrne liability.  The specific advice the plaintiffs say that was given that was negligent, is that the plaintiffs should invest in the FSLP.  That is dealt with in paragraph 12 of the draft amended statement of claim under the heading “Advice given to the Plaintiffs by the 1^st and 3^rd defendants”.  There is no suggestion that Mr Andrew Barber attended the meeting at which the advice was given or that he gave any other advice in relation to the FSLP. 

50.  In the absence of any plea of advice given by Mr Andrew Barber to the plaintiffs, a claim against him based on Hedley Byrne liability cannot succeed.

51.  It is clear that a director of the company is not liable for the wrongs done by the company to others simply because he is a director: Kuwait Asia Bank v National Mutual Life [1990] BCLC 868 and Canon Kabushiki Kaisha v Green Cartridge Co (HK) Ltd [1996] HKLR 69.

52.  The only basis upon which Mr Bedford was able to argue for Hedley Byrne liability on the part of Mr Andrew Barber is contained in paragraph 26 to 34 of the draft amended statement of claim, essentially a plea that the individual directors, including Mr Andrew Barber, knew information to the detriment of the proposed investment in the FSLP and that they failed to disclose that information to the Plaintiffs.

53.  The general rule is that a positive act or misrepresentation is required, and that “mere silence, however morally wrong, will not support an action of deceit”: see Bradford Third Equitable Benefit Building Society v Borders [1941] 2 ALL ER 205.  I accept Mr Smith’s submission that, a fortiori, the failure to disclose information alleged could not support a claim of negligence.

54.  I do not disregard paragraph 48 of the draft amended statement of claim which contains a reference to Mr Andrew Barber.  The paragraph is however not a pleading of advice given by Mr Andrew Barber upon which the plaintiffs might have relied, but an irrelevant pleading of evidence of facts that occurred after the events that might have given rise to the cause of action.

55.  In so far as the draft amended statement of claim purports to be a claim against Mr Andrew Barber in Hedley Byrne liability it does not disclose a reasonable cause of action, and to that extent is struck out.

(d)     Mr Clark:

56.  There is no plea whatsoever against Mr Clark that he owed any fiduciary duty to the Plaintiffs.  As far as Hedley Byrne liability is concerned, Mr Bedford seeks to include him in this liability by an amendment in paragraph 12, (old paragraph 14), of the draft amended statement of claim, which now includes an allegation that Mr Clark was present at a meeting at which the FSLP he was recommended, and that Mr Clark too recommended the FSLP.

57.  There are two reasons why the statement of claim, in both forms, discloses no cause of action against Mr Clark in Hedley Byrne liability.  First, in both forms, it fails completely to plead any fiduciary duty on the part of Mr Clark towards the plaintiffs. 

58.  Second, the plea in the draft amended statement of claim of an act on the part of Mr Clark, is a plea that he attended a meeting in October 1997, at which he gave advice to Mr Mortensen.  That is a plea of an act which took place in October 1997, more than six years prior to the date of the amendment.  If there were any right to a claim in this respect against Mr Clark, it is clearly statute barred.

59.  In the absence of any pleading that Mr Clark owed a duty to the plaintiffs it would be quite wrong to exercise discretion to allow the amendment.

60.  Insofar as the original or amended statement of claim purports to be a claim in Hedley Byrne liability against Mr Clark, it discloses no reasonable cause of action, and to that extent is struck out.

(e)     Mr Dunford:

61.  An appropriate plea of a fiduciary duty owed by Mr Dunford is contained in both versions of the statement of claim.  However, there is no allegation whatsoever that Mr Dunford gave any financial advice to either Plaintiff.  There is no allegation whatsoever of any direct dealing between Mr Dunford and the Plaintiffs.  There is no plea the Mr Dunford was registered as an Investment Adviser’s Representative.

62.  Paragraphs 51 to 53 above, in relation to Mr Andrew Barber, an equally relevant to Mr Dunford.

63.  In so far as the draft amended statement of claim purports to be a claim against Mr Dunford in Hedley Byrne liability it does not disclose a reasonable cause of action and to that extent is struck out.

64.  In paragraph 49 of the draft amended statement of claim Mr Clark and Mr Dunford have been added to the list of defendants alleged to have failed to ensure that a bank guarantee was in place.  For there to be any liability at all in this respect it would have been necessary to the allegation to have been made in the original statement of claim.  The requirement for a bank guarantee arose at the latest on 29 May 1998. 

65.  On any terms a claim based upon Hedley Byrne liability for the failure to ensure a bank guarantee on the part of Mr Clark and Mr Dunford is statute barred.

The Protection of Investors tort:

66.  Under s 8 Protection of Investors Ordinance a statutory tort is created whereby, (in so far as it is relevant to this case) any person who by any negligent misrepresentation induces another person to enter into any agreement for or with a view to acquiring securities shall be liable to pay compensation to that other person to any pecuniary loss that he has sustained by reason of his reliance on the misrepresentation. 

67.  The expression “negligent misrepresentation” is defined, in so far as it relates to a statement, in s 8(2)(a)(iii) as being a statement:

“which is false, misleading, or deceptive and was made without reasonable care having been taken to ensure its accuracy”.

In so far as the expression relates to a promise, it is defined in s 8(2)(b)(iii) as being a promise:

“which was made recklessly or without reasonable care having been taken to ensure that it could be fulfilled”.

68.  Sub-section (3)(a) of s 8 creates a rebuttable presumption that every person who was a director of the company which made the false statement, forecast all promise, caused or authorised it to be made.

69.  The pleading in paragraph 6 asserts the duty under s 8 of the Protection of Investors Ordinance.  Mr Bedford relies upon a number of other factual pleadings, essentially to contend that the various defendants against whom this claim is pleaded made various statements, which transpired to be false or misleading, without reasonable care having been taken to ensure the accuracy of those statements, and in particular made an assertion, (or promise), that the investment in the FSLP would be supported by a bank guarantee, without reasonable care having been taken to ensure that that promise could be fulfilled.

70.  In the course of argument Mr Bedford asserted that he mounted this claim against all defendants.

71.  Mr Ling contended that there was no evidence that the plaintiffs had entered into any agreement for the FSLP.  I am satisfied that the provisions of the Ordinance are adequately met by the acts on the part of the plaintiffs in paying their funds to Barber Asia or ISG for the purpose of investment in the FSLP.

(a)     Barber Asia, ISG, and Mr Christopher Barber:

72.  The original statement of claim contained a sufficiently clear pleading against Barber Asia, ISG, and Mr Christopher Barber, of both duties and breach of those duties under the statutory tort.  There are adequate pleadings of assertions by those three defendants that the FSLP would be supported by a bank guarantee.  It is that assertion that forms the primary basis of liability under the statutory tort.

73.  It is irrelevant that Mr Christopher Barber was not a director of Barber Asia at the relevant time.  There are clear pleadings that he personally made assertions as to the bank guarantee.  Just as his employer, Barber Asia, might be vicariously liable for his tortious act, so may he be liable.

74.  I am satisfied that, subject to the removal of references to allegations of fraud or recklessness, and the confinement of the claim to one of negligence, the statement of claim discloses a reasonable cause of action against all those three defendants.

(b)     Mr Andrew Barber:

75.  Mr Andrew Barber was a director of Barber Asia at all relevant times.  That fact was pleaded from the outset.

76.  The essential elements of the statutory tort are, (in so far as is relevant to this case), that a person, (the plaintiffs); have been induced by another person, (Barber Asia); by virtue of a representation, (the assertion that a bank guarantee will be in place to support the FSLP); to enter into an agreement, (the acquisition of the FSLP); and that the representation was a negligent misrepresentation as defined by s 8(2) of the Protection of Investors Ordinance.

77.  Liability is sought against Mr Andrew Barber, pursuant to s 8(3), which has the effect of imposing responsibility for the representation on the part of every person who was a director of a company at a time when the representation was made.

78.  The pleading that Mr Andrew Barber was a director of Barber Asia was made in the original statement of claim and was within time.  The plea of liability on the part of the company of which he was a director, Barber Asia, under the Protection of Investors Ordinance was contained in the original statement of claim.

79.  Amendments have been made to paragraph 6 of the draft amended statement of claim which particularise the allegations made by the plaintiffs under the Protection of Investors Ordinance.  The original pleading was confined to fraudulent or reckless misrepresentation, and has been expanded by the amendment to include negligent misrepresentation.  For the same reasons as set out in paragraphs 14-17 above I am satisfied that the pleading of fraud or recklessness is sufficient to include a plea of negligent misrepresentation and consequently the amendment does not offend against limitation provisions.  In all other respects the amendments constitute particulars, and not new facts.

80.  The imposition of liability on a director of a company is by way of a rebuttable presumption.  If Mr Andrew Barber can establish that he neither caused or authorised the representation to be made he will escape liability.

81.  I am satisfied that the draft amended statement of claim discloses a reasonable cause of action against Mr Andrew Barber in relation to Protection of Investors Ordinance liability, and that the amendment required does not offend against limitation provisions.

(c)     Mr Clark:

82.  Mr Clark was neither a director of Barber Asia or ISG and cannot be caught by the rebuttable presumption in s 8(3).  There are no sufficient allegations against Mr Clark to entitle the plaintiffs to rely on the deeming provision, whereby a person, although not a director, who acts in the capacity of a director, may be deemed to be a director, with consequent liability: s 8(3)(b).

83.  The only allegation made against Mr Clark as to advice is the allegation added by way of the draft amended statement of claim, in paragraph 12, that he was present at a meeting in October 1997, and recommended to Mr Mortensen that he should invest in the FSLP.  The plea that he gave such advice is an essential element of the tort which was not pleaded within time.

84.  In so far as the statement of claim purports to be a claim against Mr Clark under the statutory tort created by the Protection of Investors Ordinance, it does not disclose a reasonable cause of action, and to that extent is struck out.

(d)     Mr Dunford:

85.  The original statement of claim pleaded that Mr Dunford held office as a director of Barber Asia, (paragraph 3).  Paragraph 6 of the draft amended statement of claim, by amendment, seeks to include Mr Dunford as a person subject to the statutory duties under s 8.

86.  Liability is sought against Mr Dunford, pursuant to s 8(3), which has the effect of imposing responsibility for the representation on the part of every person who was a director of a company at a time when the representations made.

87.  The pleading that Mr Dunford was a director of Barber Asia was made in the original statement of claim and was within time.  The plea of liability on the part of the company of which he was a director, Barber Asia, under the Protection of Investors Ordinance was contained in the original statement of claim.  While in the statement of claim Mr Dunford was alleged to be a director of Barber Asia, the particular paragraph referring to the liability of both Barber Asia and its directors under the Protection of Investors Ordinance omitted to specifically referred to Mr Dunford as a director.

88.  It is precisely these circumstances that the discretion of the court to permit amendment exists under O 20 R 5.  All essential elements of the statutory tort were pleaded at the time Mr Dunford was made a party to the proceedings.  The only omission was a reference to him in the particular paragraph referring to the statutory tort.  The new cause of action against Mr Dunford arises out of the same facts as a cause of action in respect of which relief had already been claimed in the proceedings, namely Hedley Byrne liability.  I am satisfied that this is an appropriate case to exercise discretion and to allow the amendment, thereby bringing Mr Dunford within scope of the pleadings in relation to the statutory tort.

89.  The imposition of liability on a director of a company is by way of rebuttable presumption.  If Mr Dunford can establish that he neither caused nor authorised the representation to be made he will escape liability.

90.  I am satisfied that the draft amended statement of claim discloses a reasonable cause of action against Mr Dunford in relation to Protection of Investors Ordinance liability, and that the amendment required does not offend against limitation provisions. 

91.  Mr Ling said that it would be wrong to permit the claim to proceed against Mr Dunford in circumstances where there is no allegation that he was actively involved in the giving of advice.  While superficially attractive, in relation to Protection of Investors liability, the submission cannot be sustained.  The legislation imposes liability on anyone who chooses to accept the position of director of a company giving financial advice.  If bad advice is given, and loss suffered, the obligation falls on the director to rebut the presumption that he is liable.

92.  That said, I would have thought that the plaintiffs, in order to avoid any unnecessary costs, may wish to give careful consideration to any evidence Mr Andrew Barber or Mr Dunford may wish to present to them that might indicate that they, although directors of Barber Asia, were unaware of, or neither caused nor authorised the representations concerning the bank guarantee to be made.

Negligent act, (extended Hedley Byrne liability):

93.  The decision of the House of Lords in Henderson makes it clear that Hedley Byrne liability is not confined to negligent advice.  The facts relevant to this head of claim are those relating to the transfer of the plaintiffs funds out of the control of ISG, and are set out in paragraphs 25-31 above. 

94.  Mr Bedford’s argument in this respect is that the act of transferring funds from ISG’s account in London, and ultimately out of the control of ISG, was a negligent act, caught by extended Hedley Byrne liability, because there was demonstrably no bank guarantee in existence.  I am satisfied that such a claim would constitute a good cause of action. 

95.  The question that will determine whether or not a good cause of action exists depends upon the precise allegations as to who might have committed such an act.

(a)     ISG and Mr Christopher Barber:

96.  It is plain that both ISG and Mr Christopher Barber have committed acts which might fall within the scope of the claim.  ISG was the holder of the funds and permitted the funds to be transferred from its account at a time when there was no bank guarantee in place.  The allegation is that it was Mr Christopher Barber who authorised the transfer, knowing that there was no bank guarantee in place.

97.  The acts on behalf of both ISG and Mr Christopher Barber on which the plaintiff relies in relation to this claim are principally contained in paragraphs 37, 38 and 40 of the amended statement of claim, these paragraphs being added.  I am satisfied that these are not new allegations, but mere particulars of the transfer of investment funds, already pleaded, (albeit barely), and that accordingly the addition of those paragraphs does not fall foul of limitation provisions.

98.  Mr Smith contends, relying upon Williams, that unless Mr Christopher Barber had personally assumed responsibility, he could not be found liable in this respect.  While the principle in Williams is plainly correct, it is inapplicable in the circumstances of a financial adviser, who either actually gives advice, as Mr Christopher Barber has, or who performs specific acts with an investor’s funds, again as Mr Christopher Barber has.

99.  I am satisfied that the statement of claim discloses a reasonable cause of action against ISG and Mr Christopher Barber under extended Hedley Byrne liability.

(b)     Barber Asia, Mr Andrew Barber, Mr Clark and Mr Dunford

100.  There are no allegations whatsoever of negligent acts on the part of Barber Asia, Mr Andrew Barber, Mr Clark or Mr Dunford.  There is no suggestion that it was improper for Barber Asia to place the funds with ISG is a trustee. 

101.  There is not even an allegation that Mr Andrew Barber, Mr Clark or Mr Dunford were aware that Mr Christopher Barber had undertaken the relevant transfer of funds.  The best that can be said, on the pleadings, against Mr Andrew Barber, Mr Clark or Mr Dunford is that they sat aside and took no action while Mr Christopher Barber transferred the funds in the absence of a bank guarantee.

102.  Just as silence does not constitute a negligent misrepresentation, neither could sitting by and taking no action constitute a negligent act for extended Hedley Byrne liability.

103.  In so far as it purports to constitute a claim against Barber Asia, Mr Andrew Barber, Mr Clark or Mr Dunford in extended Hedley Byrne liability statement of claim discloses no reasonable cause of action, and to that extent is struck out.

A claim in contract:

104.  The allegation of a claim in contract may be dealt with shortly.  In the course of argument Mr Bedford conceded that no contract was pleaded, and that there was none that could be relied upon.  In so far as the statement of claim purports to constitute a claim against Barber Asia, Mr Christopher Barber and Mr Andrew Barber, in contract, it discloses no reasonable cause of action, and to that extent is struck out.

Professional negligence or breach of the Code of Conduct:

105.  The claim for professional negligence is based upon an allegation, contained in paragraph 4 of the draft amended statement of claim, (also originally pleaded), that Barber Asia, Mr Christopher Barber and Mr Andrew Barber, all being “registered persons” under the Securities Ordinance, Cap 333, were subject to duties arising from the Code of Conduct Persons Registered with the Securities and Futures Commission, (the Code).  This claim is confined to a claim against those three defendants.

106.  Although no proper references to the particular provisions of the Code are specified in the statement of claim, I am satisfied that the contention that a registered person, subject to the Code, may be liable in negligence, should he act in breach of the Code, constitutes a good cause of action.  Whether the acts alleged constitute breaches of the Code, and consequently negligence, is plainly a matter for trial.

107.  In so far as a statement of claim purports to be a claim in professional negligence against Barber Asia, Mr Christopher Barber and Mr Andrew Barber, I am satisfied that, subject to any particulars that may have to be supplied relating the acts alleged to particular provisions of the Code, a reasonable cause of action is disclosed.

Breach of trust:

108.  This claim is confined to a claim against ISG, and Mr Christopher Barber.  In order to support the claim of breach of trust, Mr Bedford relies upon paragraphs 16, 25, 37, 38, and 40 of the draft amended statement of claim.  It seems to me that he needs also to rely upon the general allegation in paragraph 49.  Mr Smith, although not challenging the proposition that the statement of claim discloses a reasonable cause of action against ISG and Mr Christopher Barber for breach of trust, complains that paragraphs 37, 38 and 40, contain new pleas which are too late.

109.  Paragraph 49 of the draft amended statement of claim, (and the original statement of claim), contained a plea that a bank guarantee had not been in place.  I am satisfied that paragraphs 37, 38, and 40 of the draft amended statement of claim simply supply relevant particulars to support the allegation in paragraph 49, and that no limitation issue arises.

110.  Mr Smith also relies upon Williams to contend that Mr Christopher Barber cannot be personally liable for the actions of ISG.  Again, Williams is plainly distinguishable.  On the pleadings Mr Christopher Barber was the person who attended to the transfer of funds, and one of the persons who had made the assertions concerning the existence of a bank guarantee.

111.  I am satisfied that the draft amended statement of claim discloses a reasonable cause of action against ISG and Mr Christopher Barber for breach of trust.

Money had and received:

112.  The claim for money had and received is a claim restricted to ISG.  Mr Smith does not contend that there is no reasonable cause of action.  The statement of claim discloses a reasonable cause of action against ISG.

The” Tracing” claim:

113.  Paragraph 9 of the prayers for relief seeks what Mr Bedford describes as a “tracing claim”.  Mr Bedford seeks this relief against Mr Christopher Barber, Mr Andrew Barber, Mr Clark, and Mr Dunford.  Mr Bedford described the tracing claim is arising through either a constructive trust, or an unjust enrichment.

114.  The leading authority on tracing is that of Foskett v McKeown & Ors [2001] 1 AC 102.  There Lord Millett notes, at p 128D, that:

“Tracing is thus neither a claim nor a remedy.  It is merely the process by which a claimant demonstrates what has happened to his property, identifies its proceeds and the persons who have handled or received them, and justifies his claim that the proceeds can properly be regarded as representing his property.  Tracing is also distinct from claiming.  It identifies the traceable proceeds of the claimant’s property.  It enables the claimant to substitute the traceable proceeds for the original asset as the subject matter of his claim.  But it does not affect or establish his claim.”

In that case the plaintiff brought an action against a trustee who wrongfully misappropriated trust money, mixed with his own, and used to pay for an asset for the benefit of his children.  Once that cause of action, breach of trust, was properly established, the equitable tracing rules were available to the plaintiff as part of his relief.

115.  Thus, orders for tracing may be made, following the establishment of a proper cause of action.  Consequently in any of the circumstances where, following this judgement and trial, there has been found to be a reasonable cause of action, the Plaintiffs will, upon the establishment of that cause of action, be entitled to seek tracing or any other orders to which they are entitled, to recover their funds.  Tracing, by itself, is not a cause of action.  The relief is properly sought and relates to all of the causes of action which survive this judgement.

Summary:

116.  In summary therefore I am satisfied:

(a)     the draft amended statement of claim discloses a reasonable cause of action against Barber Asia and Mr Christopher Barber for Hedley Byrne negligent misrepresentation;

(b)    the draft amended statement of claim discloses a reasonable cause of action against Barber Asia, ISG, Mr Christopher Barber, Mr Andrew Barber, and Mr Dunford in relation to the statutory tort under the Protection of Investors Ordinance;

(c)     the draft amended statement of claim discloses a reasonable cause of action against ISG and Mr Christopher Barber for extended Hedley Byrne negligent acts;

(d)    the draft amended statement of claim discloses no cause of action against any defendant for breach of contract;

(e)     the draft amended statement of claim discloses a cause of action against Barber Asia, Mr Christopher Barber, and Mr Andrew Barber professional negligence, consequent upon breaches of the Code of Conduct for Persons Registered with the Securities and Futures Commission, (March 1996);

(f)     the draft amended statement of claim discloses a reasonable cause of action against ISG and Mr Christopher Barber for breach of trust;

(g)     the draft amended statement of claim discloses a reasonable cause of action against ISG for money had and received.

Costs:

117.  ISG, Mr Christopher Barber and Mr Andrew Barber and Mr Dunford have succeeded in having some of the causes of action against them struck out, but they remain parties to the proceedings and face liability under other causes of action which have survived this judgement.  There will be an order nisi that costs on the application to amend and the application to strike out will be costs in the cause.

118.  Mr Clark has succeeded in having all causes of action against him struck out.  There will be an order nisi that the plaintiffs must pay the costs of Mr Clark, to be taxed on a party and party basis.

The way forward:

119.  Having regard to the unfortunate way in which the case has been pleaded, I have had a good deal of difficulty in relating the findings I have made to particular paragraphs, sentences, phrases, or words in the draft amended statement of claim.  In the normal course of events the statement of claim would either be completely struck out, or particular paragraphs, sentences, phrases, or words would be struck out.  This cannot be done easily in this case.

120.  It seems to me that it would now be appropriate for a second draft amended statement of claim to be prepared, in which the facts which I have permitted to be pleaded by way of this judgement are appropriately pleaded, and the various causes of action identified, with appropriate reference to the facts essential to each cause of action.  It follows that where I have not referred to amendments that have been made in the draft amended statement of claim, I am satisfied that no time issue arises.

Mr Nigel Bedford, instructed by Messrs Weir & Associates, for the Plaintiffs

1^st Defendnat, Barber Asia Limited, in person, absent

Mr Clifford Smith, SC, instructed by Messrs Tanner de Witt, for the 2^nd, 3^rd and 5^th Defendants

Mr Nicholas Pirie, instructed by Messrs John M Pickavant & Co, for the 4^th Defendant

Mr C W Ling, instructed by Messrs Robertsons, for the 7^th Defendants

Appeal allowed: see CACV156/2007, CACV163/2007 , CACV165/2007, CACV180/2007 and CACV181/2007 dated 8 May 2008