CHOW HOW YEEN MARGARET AND OTHERS v. WEX PHARMACEUTICALS INC. AND ANOTHER

HCA 537/2013

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 537 OF 2013

____________

____________

_____________

D E C I S I O N

_____________

1.  By a judgment dated 13 January 2017, this court found that fraudulent misrepresentation and deliberate concealment of the fraud were established against the defendants and ordered damages against them. The defendants lodged an appeal in CACV 33/2017. This is the defendants’ application for stay pending appeal. The grounds are that the appeal would be rendered nugatory if the defendants are to pay the damages to the plaintiffs now.

Legal principles

2.  The legal principles are well established.  An appeal does not operate as a stay of execution: Order 59, rule 13(1)(a).

3.  The court is reluctant to deprive a successful litigant of the fruits of the litigation pending the appeal.  The applicant has to demonstrate good reasons for a stay of execution.  The court must form a preliminary view of the merits or strength of the appeal.  The existence of merely arguable grounds of appeal cannot by itself amount to sufficient reason to justify a stay; it is the minimum requirement before a court would even begin to consider granting a stay.  The applicant has to provide additional reasons why a stay is justified, eg that the appeal would be rendered nugatory.  If there are not even arguable grounds of appeal, no stay of execution will be granted.  See Star Play Development Ltd v Bess Fashion Management Co Ltd [2007] 5 HKC 84, §§7-10, Ma J (as he then was).

Application of the legal principles

4.  Mr Carolan submits that the plaintiffs’ claims could only have succeeded in respect of 40,000 shares purchased based on the pleaded case, and there was absence of an essential ingredient to their claim in deceit.  The grounds of appeal were numerous but can be classified as follows:

(i) That the court erred in finding that it was the making of the Share Agreement which resulted in the investments and not the CP Representation which had only induced the Distribution Agreements.

(ii) That the court erred in finding that being induced to enter into the Distribution Agreements and Share Agreement would cause the plaintiffs to buy the number of shares it did (Notice of Appeal §§(1)(a), (2), (6), (8)(a)-(d), (f)-(j) and (9)(a)-(c)).

(iii) That the court erred in finding that the GlobalMed Representation was a fraudulent misrepresentation (Notice of Appeal §(10)).

(iv) That the plaintiffs’ pleadings were inadequate in that they only pleaded that the purchase of shares was made in consideration of the “licence free grant of the Peru distribution rights”. In other words, the plaintiffs had failed to plead a case of reliance on the CP Representation (Notice of Appeal §§(4), (5), (6), (8)(e) and (9)(d)) (the “Pleading Point”).

(v) The court erred in ordering the amount of loss and damage it did (Notice of Appeal §(7)) (the “Damages Point”).

5.  The first 3 Points are essentially appeals against findings of facts.  The affirmation of Mr Benjamin Lau, solicitor of Baker & Mckenzie for the defendants, does not even say that the grounds are arguable.  Nowhere is it even alleged that this court was “plainly wrong” to justify interference by the Court of Appeal: Ting Kwok Keung v Tam Dick Yuen & ors (2002) 5 HKCFAR 336, §42.

6.  The Pleading Point likewise has no merits.  Mr Remedios and Ms Yvonne Ngai have extracted §§21, 22, 25, 31, 34, 38, 39 and 48 of the re-re-amended statement of claim (“SOC”) in their skeleton submission.  Those paragraphs, amongst others, pleaded clearly that although §21 of the SOC pleaded that the shares were purchased pursuant to the Share Agreement, the inducement came from the misrepresentation as to the existence and ownership of the China Patent. Without the misrepresentation, the plaintiffs would not have subscribed to the private placements. 

7.  At the trial, Mr Carolan have raised various issues about the failure of the plaintiffs in pleading the essential elements of the cause of action in fraudulent misrepresentation.  In §40 of the judgment, this court held that Mr Carolan’s submission that the plaintiffs have not pleaded material issues was wrong throughout.  He runs similar arguments now, again ignoring or misreading, amongst others, the pleas in the preceding paragraph. 

8.  With regard to the Damages Point, the error in the judgment came about because of the wrong reference by the court to a prior schedule of agreed damages submitted by the parties at the trial.  The figures have since been amended by consent.  Mr Carolan further submits that the plaintiffs’ claim should be limited to the value of 40,000 shares.  This may be a point of law, but having regard to my findings on facts, I find it to be nothing more than being arguable.

9.  My preliminary view is that there is only one arguable ground of appeal with little prospect of success.

Additional reasons for stay

10.  The defendants say that if they are successful in the appeal, there is a risk that the plaintiffs would fail to return the amounts of the judgment sum and interests to the defendants. 

11.  Clearly the defendants have no case for a stay against P1 (Ms Chow). She has landed properties in Hong Kong worth more than the judgment debt.  At the end of his submission, Mr Carolan limited his application to P2 and P3 only.

12.  With regard to P2 and P3, the defendants say that:

(a) P2 and P3 are corporate vehicles of Ms Chow with no substantial assets of their own.  Ms Chow had a record in prior proceedings (“the Winland proceedings”) of allowing another entity (Winland) to go into liquidation leaving the defendants’ taxed costs unpaid (“ground 1”);

(b) Ms Chow has offered no personal undertaking to return judgment sums paid to P2 or P3 if the defendants were to succeed in the appeal (“the undertaking”) (“ground 2”).

13.  In respect of ground 1, Ms Chow has provided evidence to show that each of P2 or P3 is not impecunious as each beneficially owns landed properties in Hong Kong worth much more than the judgment sum due to each of them.  The defendants have no evidence in rebuttal. 

14.  Further, the plaintiffs in the present case were not parties to the Winland proceedings.  The defendants here cannot show that Winland could but evaded the judgment debt, as opposed to being impecunious and hence unable to pay the judgment debt.

15.  Ground 1 fails.

16.  Ground 2 is a misleading half-truth.  The defendants offered to pay the judgment debts into court pending the appeal in exchange for the undertaking from Ms Chow.  Ms Chow readily agreed to give the undertaking subject to the defendants informing her of the terms of the undertaking.  Had this been pursued, the present hearing could have been avoided. However, the defendants backed out.   There was no sign of the defendants having the means to make a payment-in.  They were simply playing delaying tactics 14 years after they first deceived Ms Chow.  Ground 2 fails.

Conclusion

17.  This is but the defendants’ desperate try-on to avoid paying the judgment debt pending appeal.  On a nisi basis, I dismiss the application with indemnity costs to the plaintiffs, to be taxed if not agreed. There shall be certificates for Mr Remedios and Ms Ngai.

18.  I thank counsel for their assistance.

HCA 537/2013

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 537 OF 2013

____________

____________

_____________________

J U D G M E N T

_____________________

A. INTRODUCTION

1.  The Defendants represented to the Plaintiffs that they had ownership of a patent to manufacture a drug.  They lost the ownership in PRC proceedings before the 1^st Plaintiff (through a nominee company) entered into a distribution agreement and before the Plaintiffs started purchasing shares of the 1^st Defendant pursuant to a share agreement.  The distribution agreement was never performed.  The share price dropped when the loss of ownership of the patent was announced some years after the loss.

2.  The Plaintiffs sue for loss in the value of the shares, basing their claim on the Defendants’ fraudulent misrepresentation.  The Defendants deny the claim and assert that it was time-barred.  The Plaintiffs contend that the limitation time has been extended because of the Defendants’ deliberate concealment of the fraud from the Plaintiffs.

B.  THE UNDISPUTED FACTS

3.  The 1^st Plaintiff (“Ms Chow”) is a 50% shareholder and one of 2 directors of the 2^nd and 3^rd Plaintiffs (“GCXL” and “Muscular” respectively).

4.  The 1^st Defendant (“WEX”) is a company incorporated under the federal laws of Canada and had been a listed company in Canada until it was privatized in 2011.

5.  The 2^nd Defendant (“WEX HK”) was incorporated in Hong Kong and is a wholly owned subsidiary of WEX.

6.  Nanning Maple Leaf Pharmaceutical Company Limited (“Nanning”) was incorporated in Mainland China.  It was a subsidiary of WEX. 

7.  WEX and its subsidiaries were engaged in, amongst others, the manufacture and commercialization of Tetrodin for treatment of drug withdrawal from all opiate addition.  Tetrodin contained a substance called TTX.  The use of TTX for the aforesaid purpose was protected by the subject patent (“the China Patent”).  Nanning manufactured all of WEX’s TTX in Nanning, PRC.

8.  Mr Shum Hay Kong Frank (“Mr Shum”) was:

(a)   The President and CEO of WEX until 16 August 2005, and a director until 26 January 2006;

(b)   The CEO, Chairman and a Director of WEX HK until 2 December 2005;

(c)   The Chairman and legal representative of Nanning.

9.  Grace was Mr Shum’s assistant.  She was also the Director of Business Development of WEX and a Director and Deputy Manager of WEX HK.  As Mr Shum did not speak English, she had been his interpreter in all the meetings that Mr Shum held with Ms Chow.

10.  Pursuant to discussions with Mr Shum, Ms Chow and her business partner (“Mr Ma”) acquired rights to sell Tetrodin in Peru for 6 years from the date of signing of a distribution agreement.  The parties to the distribution agreement were Winland Enterprises Group Inc (“Winland”) nominated by Ms Chow, and a subsidiary of WEX known as GlobalMed Corp of Infinitrust Bank & Trust with an address in Grenada (“GlobalMed”).

11.  A total of 3 Distribution Agreements (“the Distribution Agreements”) had been entered into, one after another:

(a)   The 1^st GlobalMed Agreement dated 12 November 2001;

(b)   The 2^nd GlobalMed Agreement dated 5 December 2001, at the request of Mr Shum, to replace the 1^st; and

(c)   The Acro Pharm Agreement dated 21 May 2003 which replaced the 1st GlobalMed Agreement on the same terms.

None of these Agreements had been performed by GlobalMed/ Acro Pharm.

12.  In the course of their discussions, Mr Shum represented, amongst others, to Ms Chow that Nanning owned the China Patent (“the CP Representation”). Nanning would manufacture Tetrodin from the Nanning manufacturing facility.  WEX HK owned the exclusive distribution rights for Tetrodin, was in a position to grant the exclusive distributorship for Tetrodin for drug abstinence in every country except PRC, Hong Kong and Canada and could grant that exclusive distribution right in Peru to Ms Chow and Mr Ma.  Mr Shum also said that he was a director of, amongst others, GlobalMed, and that he was authorized by WEX and GlobalMed to sign all their agreements with Winland.  Ms Chow was told that exclusive distribution rights would be granted for 6 years from the date of signing the Distribution Agreement with GlobalMed.

13.  It transpired that since March 1995, Nanning had been engaged in litigation (“the CP Litigation”) with the People’s Liberation Army Institute of Pharmaceutical Chemistry (“the PLA”), Qiu and Pan over the ownership of the China Patent. 

14.  On 22 January 2000, the State Intellectual Property Office of the PRC (“SIPO”) registered Nanning as the owner of the China Patent.

15.  On 19 March 2000, the PRC Court held that Nanning was not the qualified applicant of the China Patent.  An appeal against the judgment was dismissed on 27 November 2001 (“the Final Judgment”).

16.  The Final Judgment held, amongst others, that:

“Assigning the right to apply for the patent of the invention to [Nanning] by [Pan] and [Qiu] in the absence of any consent obtained from the [PLA] was an invalid legal act, and the agreement on such assignment had no legal force”. [Nanning] was not a qualified applicant of the China Patent.”

17.  On 22 November 2002, SIPO changed the name of the registered owner of the China Patent from Nanning to PLA and Qiu (“SIPO’s Decision”).

18.  Nanning’s Administrative Action between 2003 and 2004 to challenge SIPO’s Decision failed both at first instance in 2003 and on appeal.  Nanning’s petition for retrial of the Administrative Action was dismissed on 15 March 2005 by the Beijing Higher People’s Court.

19.  WEX publicly announced the loss of the China Patent on 29 June 2005 (“the 2005 Announcement”), 3½ years after the Final Judgment.

C.  THE PARTIES’ RESPECTIVE CASE

20.  There were 2 sets of alleged fraudulent misrepresentation – as to the CP Representation and as to the existence of GlobalMed (“the GlobalMed Representation”). 

21.  Ms Chow claimed that she was induced by the fraudulent misrepresentations to enter into the Distribution Agreements and a Share Agreement.  Under the Share Agreement, Mr Shum promised to give her the distribution rights in Peru for free on condition that she/Mr Ma purchased a minimum of 50,000 shares of WEX per year, and the shares would be locked up for 12 months from the date of their issue. 

22.  However, Mr Shum knew that WEX had lost the China Patent by the time of the Final Judgment or SIPO’s Decision (at the latest) and that loss was fraudulently concealed from her.

23.  Meanwhile, (beginning 3 days after the Final Judgment), Ms Chow/Mr Ma had started to purchase WEX’s shares through private placements, tabulated below:

Table A

Date Paid	Date Issued	Placee	Certificate Number	Shares Purchased	Unit Price (C$)	Amount Paid (C$)
30-Nov-01	18-Dec-01	Red Robin	Unknown	30,000	2.05	61,500.00
Unknown	18-Dec-01	Asian World	1084	20,000	2.05	41,000.00
Unknown	10-Dec-02	Chow	Unknown	50,000	1.90	95,000.00
Unknown	10-Dec-02	Chow	1478	55,000 5,000	1.90	104,500.00 9,500.00
Unknown	14-Feb-03	Chow	1520	10,000	2.04	20,400.00
06-Oct-03	6-Nov-03	GCXL	01708-01729	52,500	1.95	102,375.00
23-Oct-03				165,428		322,584.60
Unknown	18-Dec-03	Asian World	1892	20,000	5.00	100,000.00
12-Jan-04	30-Jan-04	Muscular	2103	40,000	5.00	200,000.00
Unknown	30-Jan-04	E-Top	2104	20,000	5.00	100,000.00
09-Sep-04	27-Oct-04	Chow	02501-02520	200,000	2.70	540,000.00
29-Oct-04	Unknown 29-Oct-04	GCXL	2572	217,928	2.30	501,234.40
Total:				830,856		2,093,594.00

(Note: the deleted figures were in the original Statement of Claim.  The grey highlighted items represented shares purchased by the Plaintiffs’ side.)

24.  The share price dropped significantly after the 2005 Announcement and Ms Chow/her companies suffered loss as a result. 

25.  Ms Chow was alerted to a change in status of the China Patent only when a Mr Carey of WEX called her up in April 2010 to terminate the Acro Pharm Agreement.  It was not until 23 September 2011, after some enquiries, that Ms Chow, through PRC lawyers, finally got a notarized copy of the Final Judgment and discovered the loss of the China Patent.

26.  WEX and WEX HK denied that there was fraudulent misrepresentation.  They claimed that Mr Shum honestly believed that despite the Final Judgment, he could still “appeal” and that he had not “lost” until the decision in the appeal in the administrative action.  Ms Chow had not relied on the CP Representation and she bought the shares as investment. WEX/WEX HK also claimed that the Plaintiffs were time barred.  With reasonable diligence, the Plaintiffs could have discovered the misrepresentation in 2005.  With another 12-18 months to make enquiries, the Plaintiffs would have been able to learn the truth by about March 2007. 

D.  THE ISSUES

27.  The issues in this case can be classified as follows:

(1)   Whether Mr Shum had misrepresented facts to Ms Chow;

(2)   Whether the misrepresentation was fraudulent;

(3)   Whether the Share Agreement existed;

(4)   Whether Ms Chow had relied on the representation of Mr Shum;

(5)   Whether Ms Chow knew of the loss of the China Patent;

(6)   Whether with reasonable diligence Ms Chow could have discovered WEX’s loss of the China Patent in 2005;

(7)   The quantum of loss suffered by Ms Chow/her companies.

28.  The issue on agency was, rightly in my view, no longer pursued in the final submission of WEX/WEX HK.  With the positions they held, Mr Shum and Grace clearly had authority to act on behalf of and bind WEX/WEX HK.  WEX HK was clearly the agent of WEX as evidenced by its receipt of the purchase price for the private placements of shares.

E.  CREDIBILITY OF WITNESSES

29.  On the Plaintiffs’ side, Ms Chow and Ms Chan Ching Ching’s evidence was adduced.  On the Defendants’ side, Mr Shum and Grace gave evidence.  The witness statement of Mr Stafford was admitted without calling him, although his evidence was not quite relevant to the issues.

30.  The Plaintiffs’ case depended on facts dating as far back as 15 years.  There were contemporaneous records, except for the alleged Share Agreement. 

31.  Mr Shum and Grace used to be Third Parties.  However, by written agreements, the Defendants had agreed to withdraw the third party proceedings against them upon their agreement to give witness statements on behalf of the Defendants (“the Withdrawal Agreements”).  In ordering specific discovery of the Withdrawal Agreements, I took the view that without the evidence of Mr Shum or Grace, the Defendants would face an uphill fight; thus securing their cooperation was of utmost importance.  If the Plaintiffs were to succeed, damages might be recoverable from Mr Shum and Grace.  As such, those 2 witnesses had a stake in seeing that the Defendants would not lose the case. 

32.  Having heard them give evidence, I maintain my view as to the importance of Mr Shum and Grace as witnesses but there was nothing to persuade me that they had been influenced in any way by the terms of the Withdrawal Agreements when giving evidence. 

33.  Mr Shum was aged over 70 at the time of the trial.  Although he might not recall every detail, I am satisfied that he could remember the major events well. 

F.  LEGAL PRINCIPLES ON FRAUDULENT MISREPRESENTATION

34.  The principles on fraudulent misrepresentation are not in dispute:  Haifa International Finance Co Ltd v Concord Strategic Investments Ltd [2009] 4 HKLRD 29, Cheung JA, §15.

(1)   There must be a representation of fact made by words or conduct.

(2)   The representation must be made with knowledge that it is or may be false. It must be wilfully false, or at least made in the absence of any genuine belief that it is true.

(3)   The representation must be made with the intention that it should be acted upon by the claimant, or by a class of persons which includes the claimant, in the manner which resulted in damage to him.

(4)   It must be proved that the claimant has acted upon the false statement.

(5)   It must be proved that the claimant suffered damage by so doing.

35.  On the question of falsity:

(a)   It is for the plaintiffs to prove that the representations were false.

(b)   When considering whether a representation which is capable of having different meanings was false, one takes as its meaning the way it would have been understood by a reasonable person in the position of the person to whom it was made.

(c)   A representation will not be false simply because it is not entirely correct, provided it is substantially correct, and the difference between what is represented and what is actually correct would not have been likely to induce a reasonable person in the position of the claimant to enter into the contract.

See China Alarm Holdings Acquisitions LLC & anor v Ing Alexander Yim Leung & ors, HCA 503/2012, 24 March 2016, at §§74 and 76, DHCJ Keith.

36.  On the question of mental element required for a claim in fraud, the classic statement is in Derry v Peek (1889) 14 App Cas 337, at p 374, Lord Herschell:

“... fraud is proved when it is shown that a false representation has been made (1) knowingly, (2) without belief in its truth, or (3) recklessly, careless whether it be true or false. Although I have treated the second and third as distinct cases, I think the third is but an instance of the second, for one who makes a statement under such circumstances can have no real belief in the truth of what he states. To prevent a false statement from being fraudulent, there must, I think, always be an honest belief in its truth.”

37.  It is enough to establish that the defendant suspected that his statement might be inaccurate, or that it was false.  Lord Cairns in Reese River Silver Mining Co Ltd v Smith (1869) LR 4 HL 64, §§79-80 expressed the principle as follows:

“...if persons take upon themselves to make assertions as to which they are ignorant whether they are true or untrue, they must, in a civil point of view, be held as responsible as if they had asserted that which they knew to be untrue.”

38.  It is sufficient for the plaintiff to show that the representation was a factor in the plaintiff’s decision and that, but for it, he might (not would)have acted differently: see Raiffeisen Zentralbank Osterreich AG v Royal Bank of Scotland plc [2011] Bus. L. R. D65.

G.  LEGAL PRINCIPLES ON PLEADING FRAUD

39.  Fraud must be distinctly alleged and as distinctly proved.  It is not necessary to use the word “fraud” or “dishonestly” if the facts which make the conduct complained of fraudulent are pleaded; but, if the facts pleaded are consistent with innocence, then it is not open to the court to find fraud.  Where the facts are complicated, it is incumbent upon the pleader to make it clear when dishonesty is alleged. If he uses language which is equivocal, rendering it doubtful whether he is in fact relying on the alleged dishonesty of the transaction, this will be fatal; the allegation of its dishonest nature will not have been pleaded with sufficient clarity. See Haifa International v Concord, following Armitage v Nurse [1998] Ch 241 at 256-257, and Belmont Finance Corporation Ltd v Williams Furniture Ltd [1979] Ch 250, at 268.

H.  PLEADING ISSUES

40.  Mr Carolan (counsel for the Defendants) has submitted that the Plaintiffs have not pleaded various material issues. Mr Remedios (counsel for the Plaintiffs) has clearly demonstrated, and I accept, that Mr Carolan’s submission in this respect was wrong throughout. 

I.  MISREPRESENTATION AS TO OWNERSHIP OF THE CHINESE PATENT

41.  Mr Shum and Grace gave Ms Chow a copy of the China Patent.  In addition, clause 2.1 of the recital to each of the Distribution Agreements stated that GlobalMed or Acro Pharm exclusively distributed, sold and marketed the drug Tetrodin which was protected by patent and related IP and know-how owned and manufactured by WEX, Nanning, WEX HK.  There was no dispute that the CP Representation was true when made.  The question was when it became false.

42.  Both experts agreed that there was no right of appeal against the Final Judgment.  It was a legally effective judgment from the date it was made (or served, the exact date being immaterial in this case). SIPO’s registration was an administrative act.  SIPO was bound to register PLA and Qiu as owners of the China Patent upon application and in accordance with the Final Judgment.

43.  What divided the experts was whether the Final Judgment took effect on its date of issue (Plaintiffs’ case) or the date when SIPO registered the change of owners on 22 November 2002 (Defendants’ case).  I shall call the period in between these 2 dates “the Transitional Period”.

44.  To resolve the difference, it is necessary to analyze Article 10(3) of the PRC Patent Law 2000 and the Guidelines (“GL”) issued thereunder. 

45.  Article 10(3) provides that:

“Where the right to apply for a patent or the patent right is assigned, the parties shall conclude a written contract and register it with the patent administration department under the State Council. The patent administration department under the State Council shall announce the registration. The assignment shall take effect as of the date of registration.” (underline added）

46.  Sub-clause (2) in clause 3.7.2.4 (“GL2”) provides as follows:

“Where the request for a change is submitted due to a right transfer (轉移) as a result of a dispute over the ownership of the right of the applicant or patentee or where the request to make a change is due to the dispute over the eligibility of the inventor, the person requesting a change in the bibliographic data shall submit an agreement of transfer of the right signed or sealed by all the interested parties if the dispute has been settled through negotiations; if the dispute is settled by the People’s Court through judgment, the judgment of the People’s Court which has been taken into effect shall be submitted. The patent office shall, after receiving the judgment inquire the parties concerned whether or not an appeal has been lodged. Where no response is made or no appeal has been lodged within the specified time limit (2 months), the judgment will be effective; where the appeal has been lodged, the parties shall file the Notification of Acceptance of the appeal, the judgment of the original court will not be effective.” (underline added)

47.  Sub-clause (3) in clause 3.7.2.4 (“GL3”) provides as follows:

“If there is a change of right due to assignment (轉讓) of grant of the patent applicant or patentee, the applicant or patentee who request for a change of the patent shall submit the original of the assignment or a grant or notarized copy. If the contract is made by a legal person, that legal representative or authorized person must sign on the contract or seal on the contract and the official seal of the legal person or the seal exclusively used for contract must be sealed too. If necessary, the notarized document has to be submitted. If the contract is made by citizens, the person concerned has to sign and seal the document. If necessary, a notarized document has to be submitted if there are more than one applicant for patent or patentees. The certifying materials of all the parties certifying the grant has to be submitted.”

48.  Clause 3.7.4 provides that:

“The change in the right to apply for a patent shall be taken into effect as of the date of registration, which is the date of issuance of the Notification of Passing Examination on Formalities.”

49.  According to Mr Dong (Defendants’ expert), the courts only resolve the dispute over ownership.  The registration of changing the ownership of the right is determined by SIPO based on the judgment.  The word “assignment” in Article 10(3) means all kinds of transactions.  The Patent Law is a higher-level law than the Guidelines.  Article 10(3) applies to all kinds of transfers (including judgments) and not just assignments. 

50.  On the other hand, Mr Xiong (Plaintiffs’ expert) says that “assignment” is confined to a “buying and selling act” between 2 parties and not judgments (which are public).  A judgment is effective even without SIPO’s registration, whereas an assignment needs to be registered for the public to be informed.  Judgments are covered by GL2.

51.  I prefer the views of Mr Xiong.  The Chinese terms “轉讓” and “轉移” are different.  The former connotes a commercial act whereas the latter can cover broader kinds of situation like a judgment or succession.  A judgment simply does not fall within Article 10(3).

52.  I also accept Mr Xiong’s view that the effect of the Final Judgment was that Nanning was never the owner of the China Patent.  Nanning could not from the date of the Final Judgment lawfully manufacture or sell Tetrodin manufactured at the Nanning Facility for use in the treatment of drug abstinence without reacquiring ownership of the China Patent or obtaining a license from the PLA and Qiu to do so.

53.  Further, Mr Dong accepts that Nanning was only a nominal owner in the Transitional Period:

“Nanning had the nominal right to exploit the China Patent during [the Transitional Period]. However, as the dispute over the ownership of the right to apply for the China Patent was resolved in the Final Judgment, it might be advisable (though not strictly necessary) for Nanning to seek approval from the co-owners of the China Patent after the Final Judgment but before the registration for the change in patent right for exploiting the patent, including manufacturing, selling, offering to sell ... Tetrodonin, or any drug containing TTX in the PRC for the Use, but for sale only by export out of the PRC.”

54.  With respect to Mr Dong, Nanning could not have been a true owner of the China Patent in the Transitional Period when its use of the China Patent was better subject to approval by other entities.  That was why he accepted in cross-examination that Nanning was the owner in name but was not the real owner.  He avoided answering the question of who would have the rights to exploit the China Patent in the Transitional Period by suggesting that PLA was barred by the 2-year limitation from suing Nanning and that Nanning could raise the “anxiety defence” to PLA’s claim.

55.  I find that the Final Judgment took effect on the date of its issue. The falsity of the CP Representation arose on that date.

J.  FRAUDULENT NATURE OF THE MISREPRESENTATION

J(1).   Fraudulent nature of the CP Representation

56.  Dishonesty must be pleaded and proved.  Facts and circumstances which are consistent with negligence or honesty are not sufficient.  FoodCo UK LLP v Henry Boot Development Ltd [2010] EWHC 358 (Ch), Lewison J, at §179.

57.  Falsity of a representation is to be tested by the meaning which the words reasonably conveyed to the representee [ie an objective test].  It is no defence to a charge of falsity that the representor intended the words to convey a different meaning which was true.  But where the inquiry is whether the representation was fraudulent, another test must be applied.  What we are now investigating is not the effect of the words upon the representee, but the state of mind of the representor when he uttered them.  In deciding whether the representation was fraudulent, the question is not whether the representor honestly believed it to be true in the sense assigned to it by the court, or on an objective consideration of its truth or falsity, but whether he honestly believed it to be true in the sense in which he understood it when it was made [ie a subjective test].  There are limitations.  The meaning professed by the representor may be so unreasonable that the court will find that he did not honestly believe it was true in that sense.  But the principle is clear: proof of fraud involves an examination of the representation in the sense in which the representor honestly understood it.  Actionable Misrepresentation, 4^th ed, Spencer Bower,§101, p 60.

58.  If due to a change of circumstances, a representor knows that his previous representation has become false, he has a duty to communicate the truth to the representee before the latter acts on the previous representation. Failure to do so amounts to fraudulent misrepresentation.  FoodCo UK LLP, at §§213-214.

59.  In this case, although the Final Judgment came after the 1^st GlobalMed Agreement, failure of Mr Shum to inform Ms Chow about the loss of the China Patent before the 2^nd GlobalMed Agreement was entered into or before each purchase of shares was made amounted to fraudulent misrepresentation: FoodCo UK LLP.

60.  Mr Shum, however, claimed to have “honestly believed” that right up to March 2005 Nanning owned the China Patent (“the honest belief”).  The honest belief was based on independent legal advice received at the time, and the fact that he still had the right to “appeal” until 15 March 2005.

61.  For the following reasons, I reject the defence of honest belief.

62.  Firstly, Mr Shum was the legal representative in the PRC litigation as stated in the various PRC judgments.  He had clear knowledge of the legal effect of the first instance judgment.  This was evidenced by his 5-page letter to the first instance judge, 10 days before the 1st GlobalMed Agreement was signed.  He stated, amongst others:

“... If a drug patent is not approved by the government for drug manufacture in a certain country, it would be of no value at all. This, too, applies to China. In order to apply for the new drug certificate in China, [Nanning] has spent more than RMB 10 million, and in order to obtain FDA accreditation, it has spent tens of millions of US dollars. Based on the judgment made in the first trial, all these expenditures will be in vain, which is such a huge waste! This is also a fatal blow to [Nanning], which is a Chinese corporation! According to the judgment made in the first trial, [Nanning] is no longer the patentee, which means that it must spend a huge sum of license fee or transfer fee to purchase the patent right or right of use from the three “co-owners”. (underline added)

63.  Secondly, as pleaded, there were 2 pieces of legal advices that WEX/WEX HK relied on (§36(a), (c) & (d) of the re-amended defence):

(a) An advice dated 27 October 2003, but there was nothing in it which supported the plea that SIPO’s Decision “was contrary to the law, would be resolved in Nanning’s favour and that regardless of result, would in no way interfere with Nanning’s business”;

(b) An advice dated 28 June 2005, but there was nothing in it which supported the plea that the PRC High Court ruling “was flawed on the basis that the interests of Qiu and Pan had been assigned to Nanning”.

The pleas were misleading.  The 2 sets of legal advice could not have led Mr Shum to hold the honest belief.

64.  Thirdly, on 11 January 2002, the PLA wrote to Nanning specifically stating that in view of the Final Judgment, the original agreement between Pan and Qiu on the establishment of Nanning for the purpose of the cooperation had become an invalid agreement, and Nanning had lost the patent application right.

65.  Mr Shum testified that he had anticipated that the PLA would apply to change the bibliographic data and remove Nanning as the registered owner. That was why on 24 January 2002, Nanning replied to the PLA confirming receipt of the letter and further stating that “our company will only accept such negotiation carried out before the change of the holder of this patent.”  In my view, Nanning would not have to enter into such negotiation at all if Mr Shum had held the honest belief.

66.  Fourthly, over the years, WEX had been issuing news releases to the public, in discharge of its duty of disclosure as a listed company.  Those news releases included disclosure of the acquisition of the China Patent (2000), the execution of the 2^nd GlobalMed Agreement (2001), and Acro Pharm getting the Sanitary Authorization (2004).  However, none of them mentioned the existence of the CP Litigation or the Administration Action. 

67.  Even the 2005 Announcement was misleading.  It stated thus:

“[WEX] has been notified that based on a court ruling (“the Ruling”)] the Chinese Patent Office (“CPO”) has changed registered ownership of the [China Patent] in China from the Company’s subsidiary, [Nanning] to one of the two inventors and a third party who alleges to have been an employer of the other inventor.

WEX filed an appeal of the Ruling earlier this year and the Court subsequently dismissed the Appeal.”

In fact, WEX had been notified of the court ruling much earlier than 2005 and there was no appeal (whether against the Final Judgment or the decisions in the Administration Action) earlier in 2005.

68.  Fifthly, Mr Shum explained that he did not disclose the loss of the China Patent to Ms Chow because it was not important.  He claimed that the CP Litigation and the Administrative Action were fought for “honour”.  If this were true, he would not have litigated in the PRC for 10 years and expended millions of dollars (as stated in his letter to the first instance judge). 

69.  Sixthly, Jennings Capital, in the process of conducting due diligence in September 2003, discovered that the China Patent was no longer in Nanning’s name.  The issue of whether the loss of the China Patent needed to be disclosed was discussed at the Board meeting on 26 August 2004, which Mr Shum had attended.  Mr Shum knew the duty of disclosure but no news release was issued in that year.

70.  Seventhly, Ms Chow’s contracting party in Peru, Equipos, had obtained the Sanitary Authorization on 24 February 2004, which authorized Equipos to import, market and sell Tetrodin in Peru manufactured only by Nanning for 5 years from 5 February 2004.  This was contrary to Mr Shum’s opinion that it was impossible to obtain authorization without clinical trials.  Mr Shum, acting on behalf of Acro Pharm, congratulated Winland and acknowledged that it was a “big leap forward” for the company. On 29 March 2004, WEX publicly announced the Sanitary Authorization, stating that as a result Tetrodin was ready for sale in Peru.  This statement was not qualified.

71.  And yet Mr Shum still requested for clinical trials in Peru in 2004. WEX was to write the protocol and pay for the Peruvian Trials.  The protocol was never completed.  The Peru Report stated that Tetrodin was not ready to go to the market.  In 2005, Shum even requested that there be a temporary delay to the Acro Pharm Agreement because of WEX’s limited finances.  These 2 requests were clearly delaying tactics of Mr Shum to cover up the loss of the patent.

72.  Mr Shum was aware of a listed company’s duty of disclosure.  However, his conduct in paragraphs 70 and 71 above actively led Ms Chow to believe that the CP Representation continued to hold true.  His conduct was fraudulent and not negligent, proud or stubborn as Mr Carolan submitted.

73.  Grace claimed that she did not know about the CP Litigation until the 2005 Announcement.  She also claimed that she never associated the loss of the China Patent with Nanning being unable to manufacture TTX to be used in the treatment of drug abstinence.  I find it hard to accept that she, being responsible for keeping a record of the patents of WEX, was not told of the loss.  Her version contradicted also Mr Shum’s evidence that everyone in WEX HK knew about the loss. 

74.  Even if I am wrong, Grace’s lack of knowledge of the loss did not affect the outcome of this case as Mr Shum was the real decision maker. 

75.  The fraudulent misrepresentation continued even after the 2005 Announcement. Performance of the Acro Pharm Agreement was suspended since 2006 until it was finally terminated in 2010.  Various reasons were given to Ms Chow but none about the loss of the China Patent. 

76.  Mr Shum would not face the reality that the Acro Pharm Agreement could not be performed.  He testified that WEX/WEX HK could still provide Tectin instead of Tetrodin to Winland, but that was not what Ms Chow bargained for. 

77.  Likewise, Grace suggested that Tetrodin could have been manufactured at other places.  That was contrary to her own Third Party Defence and the condition in the Sanitary Authorization which provided that the drug must be prepared by Nanning.

78.  I find that the misrepresentation as to ownership of the China Patent was fraudulent and reject the defence of honest belief.

J(2).  Fraudulent nature of the GlobalMed Representation

79.  Mr Shum and Grace represented to Ms Chow that GlobalMed was a wholly owned subsidiary of WEX.  The representation was false because there was no record of incorporation of a GlobalMed in Grenada but only one in Turks & Caicos Islands.  Moreover, the sole subscriber and shareholder of the Turks & Caicos company was not WEX, WEX HK or Shum.  Mr Shum was not shown to be a director of any GlobalMed and yet he had signed, amongst others, the 2 GlobalMed Agreements as director.

80.  The letter head of GlobalMed/Grenada showed a logo with elaborate design which would cause a recipient to think that there was such a company.

81.  Mr Shum claimed that he did not understand English and would have signed an English document placed before him (an excuse he would use whenever he came across English documents).  I am unable to accept that a person of his position would have signed documents without understanding them or without being a director.  Even if I am wrong, being a listed company, WEX had permitted itself to use a non-existent foreign company and had not kept proper corporate records. 

82.  I reject Mr Carolan’s submission that there was a mistake in the address as that was never the defendants’ case and there was no evidence that it was a mistake.  He also submitted that the GlobalMed Representation was a red-herring and GlobalMed had been replaced by Acro Pharm. I reject that also because the replacement took place only 2 years after 2 GlobalMed Agreements had been signed.  Taking the fraudulent CP Representation into account, I draw the inference that WEX/WEX HK deliberately used a non-existent company to avoid liability in case they lost in the CP Litigation.  It was fraudulent.

K.  INDUCEMENT

83.  As admitted by Mr Shum and Grace, Ms Chow was told that WEX was always in need of money for development, clinical studies and wanted as many investors as possible.  I also accept Ms Chow’s evidence that Mr Shum told her that WEX was in need of money for the Canadian registration of Tetrodin, to expand the Nanning manufacturing facilities and to pay for salaries of Nanning.  He invited Ms Chow to invest in WEX.

84.  There was a dispute as to whether or not there was a Share Agreement between Ms Chow/Mr Ma and Mr Shum for the former to buy at least 50,000 WEX shares for each of 3 subsequent years.  It was stated in the private placement that purchase of the shares was for investment purposes only and not with a view to resale or distribution.

85.  In stark contrast to the good documentation in relation to the Distribution Agreements, there was nothing in writing (including correspondence) relating to the Share Agreement.

86.  Ms Chow testified that she insisted on signing a distribution agreement and she did sign one before Mr Ma purchased the 1^st batch of shares.  Ms Chow agreed that by then GlobalMed had done all it was required under the Share Agreement; and without anything in writing, WEX would have difficulty in enforcement of the Share Agreement. 

87.  Recital no. 2.4 to the 3 Distribution Agreements provided that:

“in consideration of clause number 2 and all subsequent clauses in this agreement and for other valuable consideration the parties agreed to be bound ...”

88.  Mr Shum agreed that that recital included the purchase of shares, amongst other things (such as Ms Chow/Mr Ma’s contacts in the South American market). Whilst I do not agree with his interpretation of that recital, I accept his evidence (§23 of his witness statement) that WEX decided to enter into the Distribution Agreements because Ms Chow was “financially sound and willing to become a shareholder of WEX”.

89.  There was no dispute that the distribution rights were granted to Winland without a licence fee.  I find that they were in exchange for Ms Chow’s agreement to purchase WEX shares.  I accept Ms Chow’s version to be true.  The Share Agreement existed and was probably made before the 1^st GlobalMed Agreement was entered into.

90.  Grace had authority from Mr Shum to convey messages to Ms Chow from time to time, attaching WEX’s share information, to invite Ms Chow to make private placements.  Grace would say that WEX needed money and that when private placements were made, things would get done quicker, whether in the sense of making arrangements for sale in Peru, completing the clinical studies or finishing the draft protocol, upgrading the plant or pay for research staff, etc.  She had requested Ms Chow to pay the purchase price into the bank account of WEX HK in accordance with instructions from WEX HK. 

91.  The private placements suited Mr Shum because the price and quantity of shares were fixed by the relevant Stock Exchange and the shares would have a lock-up period of 12 months.  The capital raised would go to WEX and not previous owner of the shares.  On the other hand, Ms Chow would enjoy a 15% discount on share price.  She bought the shares “to push things along”. 

92.  I find that Mr Shum and Grace did induce Ms Chow and the Share Agreement did exist.  I am sure, without the China Patent, Ms Chow would not have entered into the Distribution Agreements or the Share Agreement.

L.  RELIANCE

93.  Mr Carolan submits that whilst the CP Representation was intended to be relied on by Ms Chow to enter into the Distribution Agreements, Ms Chow was either acting pursuant to the Share Agreement and/or as an investor motivated by potential profit to be earned in the usual way, not on the CP Representation. It made no sense that she would so invest only to better secure the benefits from performance of the Distribution Agreements when, on her case, this was already due to expire without more.  In February 2004, the Sanitary Authorization was obtained, which meant that export to Peru could follow without any need for further clinical trials. Yet Ms Chow continued to buy further lots of 200,000 and 217,928 shares respectively in Oct 2004.

94.  I am not persuaded by these arguments.  I repeat paragraph 92 above. I accept Ms Chow’s evidence (confirmed by §37 of Grace’s witness statement) that her focus was on the distribution rights.  She did not regard the investment in the shares was a good investment but wanted to push things along.  She did not regard spending CAD2 million on the shares as a lot of money. She was confident that even on the basis of what was in the Distribution Agreements, there was at least a 100% profit margin on the Peruvian sales.  This was credible in view of her medical and MBA qualifications and financial experience. She had started to purchase the shares 3 days after the Final Judgment and continued to do so for 3 years before the Peruvian Trials were suggested in 2004.  It would be fair to say that she had always expected the Distribution Agreements to be performed right up to Mr Carey’s communication with her.

95.  Mr Carolan points out that she has ceased further investment from January 2005 and sale of 60,000 shares in her name before the 2005 Announcement.  He also submits that the purchases and sales showed that Ms Chow had an eye on the market given that the share price had increased to CAD5.00 in December 2003 to January 2004; steadily dropping from $3.30 (January 2005 high) to $2.20 (1 June 2005) and down to $1.40 (30 June 2005 low).  

96.  Again, I am unable to accept this contention.  Ms Chow only stopped purchasing the shares and began to sell after about January 2005 when Mr Shum orally requested her to temporarily delay the commencement of the Acro Pharm Agreement.

97.  I find that Ms Chow did rely on the 2 sets of fraudulent misrepresentation to enter into the Distribution Agreements, the Share Agreement and each of the private placements.

98.  Even if I am wrong as to existence of the Share Agreement, that would not affect the overall picture.  As an ordinary shareholder, Ms Chow did rely on the inducement of Grace and the CP Representation to make each private placement.

M.  WHETHER THE LIMITATION PERIOD CAN BE POSTPONED

99.  Under section 26 of the Limitation Ordinance, Cap 347 (“the Ordinance”):

“(1) Subject to subsection (4), where in the case of any action for which a period of limitation is prescribed by this Ordinance, either –

(a) the action is based upon the fraud of the defendant;

(b) any fact relevant to the plaintiff’s right of action has been deliberately concealed from him by the defendant; ...

the period of limitation shall not begin to run until the plaintiff has discovered the fraud, concealment or mistake (as the case may be) or could with reasonable diligence have discovered it.”

100.  The issues are when Ms Chow came to know of the fraud and whether with reasonable diligence she could have discovered it earlier.

M(1).  When Ms Chow came to know about the fraud

101.  The evidence of Ms Chow and her Administrative Assistant Ms Chan was not disputed and I accept the same.

102.  Between December 2001 and May 2006, Grace had been faxing WEX’s new releases and updating Ms Chow on numerous occasions about WEX’s development.  Grace was not sure if she had sent a copy of the 2005 Announcement to Ms Chow.  I find it more likely than not that Ms Chow had not received a copy of the 2005 Announcement.  I also accept that Ms Chow herself was not used to searching the web for news of WEX/WEX HK.

103.  In April 2010, the unexpected phone call and email from Mr Carey prompted Ms Chow to make inquiries and she found the 2005 Announcement. 

104.  In December 2010, Ms Chan discovered that Nanning was still the registered owner of the China Patent according to SIPO’s website.  SIPO only announced the change of registered owner on 8 January 2003.  The date of actual change in registration (22 November 2002) was not there.

105.  Additionally, in December 2010, Mr Ma found on the internet an incomplete copy of the Final Judgment.

106.  Mainland judgments were not “public” in the way it is understood in Hong Kong.  Only parties could get a copy of the judgment.  Without the case number, parties’ names and dates, a member of the public could hardly get a copy, unless through PRC lawyers. 

107.  It was only on 4 March 2011 that Ms Chow (through PRC lawyers) obtained a certified copy of the China Patent which showed that SIPO had changed the registered ownership to PLA and Qiu on 31 October 2002.  (This was the date of grant of PLA’s request to change the bibliographic data regarding the China Patent.)

108.  On 23 September 2011, Ms Chow obtained a notarized copy of the Final Judgment.  I find that the fraudulent misrepresentation as to ownership of the China Patent came to Ms Chow’s knowledge on this date.

109.  On 15 May 2012, Baker & McKenzie wrote to Winland’s solicitors, stating that “our clients have no record of GlobalMed’s incorporation.  The fraudulent misrepresentation as to GlobalMed came to Ms Chow’s knowledge on this date.

M(2).  Whether with reasonable diligence Ms Chow could have discovered the fraud earlier

110.  WEX/WEX HK’s case is that Ms Chow could have discovered the fraud by the 2005 Announcement.  Mr Carolan accepts that 18 months for Ms Chan to do the investigation was reasonable.  Accordingly, he submits that Ms Chow could, with reasonable diligence, have discovered that the China Patent was lost by March/April 2007.  The writ was only issued on 3 April 2013.

111.  With respect, it was for WEX/WEX HK to prove that something had occurred to put Ms Chow on notice that the CP Representation might have been false: Peco Arts Inc v Hazlitt Gallery Ltd [1983] 3 All ER 193, 198e-203d; Betjemann v Betjemann [1895] 2 Ch 474, 480-482.

112.  In dealing with WEX/WEX HK’s earlier application to strike out this case on limitation ground, G Lam J had this to say in his decision dated 18 September 2013, at §§42-44:

“42. ... it would hardly appear to the plaintiffs that the defendants’ representations were false at the time when they were made in 2001 and 2003 respectively, still less that they were known by the defendants to be false when they were made. The relevant statements in the news bulletin and the annual report tend therefore to exonerate the defendants by implying that their representations were accurate prior to 2005 and that they had no knowledge prior to 2005 that the representations were false or had become false. On that basis, it seems to me that the effect of those statements is to conceal, rather than to reveal, the two facts that are crucial to the plaintiffs’ claims for fraud.

43. The defendants can point to nothing in the news bulletin and the annual reports or the surrounding circumstances that would suggest to any reader, including the plaintiffs, that the relevant statements in those public documents might be untrue, and that in fact the Beijing courts pronounced as early as in 2000 and 2001 that none of WEX, WEX HK and Nanning had any right in the China patent. On the contrary, the news bulletin and the annual reports are public announcements made by a regulated listed company which were meant to convey information accurately to shareholders and the public at large.

44.   In these circumstances there is force in Mr Remedios’ submission, relying on cases such as Betjemann v Betjemann [1895] 2 Ch 474 at 480 and Peco Arts Inc v Hazlitt Gallery Ltd [1983] 3 All ER 193 that until there was cause for suspicion, something that put them on inquiry, the plaintiffs were entitled to believe the public announcements to be accurate, without seeking to locate and turn up each and every relevant document so as to verify the facts asserted.”

...

113.  These words of G Lam J continued to hold true at the trial.  The 2005 Announcement was misleading (paragraph 67 above).  Neither WEX’s Annual Reports (2005, 2006 and 2007) nor the Annual Information Forms for 2005-2008 mentioned anything about the CP Litigation, the Administrative Action or the dates of any of the relevant judgments.  A reasonable reader would not have suspected that the CP Representation was false up to the date of the 2005 Announcement.

114.  But for the unexpected request to cancel the Acro Pharm Agreement, I find that Ms Chow would not have suspected anything wrong with the China Patent. She thereafter acted quickly to find out the truth.

115.  I find that even with reasonable diligence, Ms Chow would not have discovered the fraud until 23 September 2011.  Applying section 26 of the Ordinance, the present writ issued on 3 April 2013 was within 6 years from that date.

N.  LOSS AND DAMAGE

116.  The Plaintiffs have made previous claims against WEX/WEX HK including in HCA 1035/2011 for breach of the Share Agreement.  They could not proceed for one procedural reason or another.  Nothing there could have undermined the present claim for investment loss. 

117.  The share price had plummeted after the 2005 Announcement from CAD2.2 to CAD1.65 overnight.  In issue was whether or not WEX/WEX HK should only be liable for a maximum loss in respect of 150,000 shares, being 3 years’ purchase under the Share Agreement in the relevant period from December 2001 to November 2004. 

118.  Mr Carolan submits that Ms Chow and Mr Ma had purchased 681,000 shares more than were contractually “required”.  They had sold 110,000 in 2005, so the claim should be limited to 40,000 shares.  Moreover, he submits that she could have sold at a profit before 30 January 2014.

119.  I reject the submission.  Ms Chow had capacities of a distributor, an investor and an ordinary shareholder even if the Share Agreement did not exist.  She was induced and had relied on the CP Representation.  Ms Chow’s claim should not be limited to only 40,000 shares, although she limited herself to those shares of which she had documentary proof.

120.  The quantum was not in dispute, being based on the purchase price of the shares and commission upon sale, less the sale price.

(a)   If the court accepts Ms Chow’s case: damages would amount to CAD$1,385,276.02, made up of Chow’s loss (CAD471,882.57) + GCXL’s loss (CAD718,993.45) + Muscular’s loss (CAD194,400.00).

(b)   If the court holds that Ms Chow’s claim is limited to 40,000 shares, damages would be CAD28,061, ie (40,000 x CAD1.95) – 40,000 ÷ 217,928 x 276,435.82 + CAD800 commission.

121.  The Plaintiffs ask for interests from the respective dates of purchase of the Shares until payment. This was a case of fraud and WEX/WEX HK had concealed it for a lengthy period.  The Plaintiffs should be compensated for their loss of use of the money.  I consider it appropriate, under sections 48 and 49 of the High Court Ordinance, to award interest from the date of the respective purchase of the shares.

O.  FINDINGS AND CONCLUSION

122.  The Final Judgment took effect on the date of its issue.  Mr Shum fraudulently concealed the loss of the China Patent from Ms Chow. Ms Chow was induced to enter into the Distribution Agreements and Share Agreement.  She did not suspect that the China Patent was lost until about April 2010.  She had exercised reasonable diligence and discovered the fraud on 23 September 2011 when she obtained a notarized copy of the Final Judgment.  The writ was filed within 6 years from then.

123.  Ms Chow, GCXL and Muscular have bought the number of shares, on the dates, and at the price particularized in Table A above.  They suffered loss since the loss in the China Patent had caused substantial drop in the value of the shares.  They should be entitled to damages in accordance with paragraph 120 above.

P.  COSTS

124.  Costs should follow the event and be to the Plaintiffs. 

125.  There were 3 applications on day 1 of the trial. In respect of the application for specific discovery, costs should, in principle, be paid by the Defendants to the Plaintiffs.

126.  In respect of the application to strike-out a sentence in paragraph 46 of the witness statement of Mr Shum, I find that work done to strike-out was out of proportion to the significance of that sentence.  Notwithstanding the sentence was not relevant and it was not struck out, the Plaintiffs should, in principle, have borne the costs.

127.  In respect of the application to amend the statement of claim, most of the amendments were rejected save for those agreed by the Defendants.

128.  For all 3 applications, I take a broad brush approach and order the Plaintiffs to bear the costs of the strike-out which I assess at $30,000.  It should be set off against costs payable by the Defendants to the Plaintiffs.

129.  I therefore order as follows:

(1)   There be judgment to the Plaintiffs in the sums of CAD471,882.57, CAD718,993.45 and CAD194,400.00, respectively or their equivalent at the time of payment;

(2)   On a nisi basis, there shall be interests to the Plaintiffs on the judgment sums at judgment rate from the date of the respective purchase of the shares to the date of payment;

(3)   On a nisi basis, costs of this action should be paid by the Defendants to the Plaintiffs with certificates for 2 counsel;

(4)   On a nisi basis, the Plaintiffs shall pay $30,000 to the Defendants as costs for the striking out application; with no order as to costs on the other 2 applications.  Such costs are to be set off against costs in the preceding paragraph.

130.  I thank counsel and the PRC legal experts, Mr Xiong Yanfeng and Mr Dong Wei for their assistance.

HCA 537/2013

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 537 OF 2013

____________

__________

R U L I N G

__________

1. This is my ruling for the amendment summons and strike-out summons which I heard on day 1 of the trial:

Amendments to the statement of claim

2. Although the cause of action has not changed, the disputed amendments, if allowed, would have the effect of increasing the claim of the plaintiffs by CAD670,000.  This means that 200,000 shares purchased by Chow (P1) were not purchased at CAD2.70 each as currently pleaded but will become CAD5.50 each.

3. The plaintiffs say that it was a mistake in calculation and there is documentary evidence from the defendants’ side to support the proposed amendments. 

4. The sheer lateness of this application is enough to dismiss it. 

5. With respect, I do not regard such a substantial change to the quantum as being a mere clerical mistake or error in calculation.  It is a substantial change to the computation of part of the damages.  Moreover, the documentary evidence in support was disclosed in a further list of documents after the pre-trial review.  How could the plaintiffs expect the defendants to come up with evidence to rebut the proposed amendments in the limited amount of time? 

6. The summons for amendment proposes to give a timetable for consequential amendments.  This timetable, would mean that issues on quantum would only be defined towards the end of trial.  This simply would not enable proper cross-examination of witnesses to be done.

7. Further, Mr Carolan, counsel for the defendants, says that in the current form of pleadings, quantum is not in issue.  The amended quantum would prevent the defendants from proving the negative, ie that the plaintiffs have not paid at CAD5.5 per share in the limited time available.  This is in my view a real prejudice to the defendants which the court should not allow to happen.

8. Mr Carolan further bases his opposition on the grounds that:

(a)  The documentary evidence purportedly relied on by the plaintiffs, amongst others, the Annual Report of 2005 do not support the amendments. The Annual Report was in the original discovery just that the plaintiffs were not aware of its significant.  Mr Carolan also points out that whilst there was documentary evidence of the plaintiffs paying $2.65m for the shares in question there was nothing to support that the plaintiffs had paid at the level of the alleged CAD5.5 per share;

(b)  The witness statement of Chow did not support the plaintiffs’ case that they paid CAD5.5 per share.

9. On its face, the Annual Report of 2005 had nothing to do with Chow’s shares (as opposed to Muscular).  Chow’s own old spreadsheet also claimed CAD2.7 per share.  Even so, with respect to Mr Carolan, ground (a) concerned whether or not there was sufficient proof of the amendments.  It was not plain and obvious that the plaintiffs could not have persuaded the court in the course of evidence that there was such proof. This ground in itself would not have persuaded me to dismiss the application.

10. Ground (b) does not trouble me.  If the amendments were allowed, the court certainly has discretion to permit Chow to supplement her witness statement by oral evidence confirming the unit price of the shares and identify the documents she would rely on to establish the amendments.

11. In summary, due to the lateness in the application and the prejudice that would be caused to the defendants, I disallowed the amendments, save to the extent that they were not opposed by the defendants.

The strike-out summons

12. This concerns paragraph 46 of Shum’s witness statement which states:

“Even if WEX had lost the ownership of the China Patent, WEX could still rely on its Tectin patent to protect its use of TTX products in relieving the pain suffered by drug addicts undergoing opiate dependence withdrawal.”

13. Mr Remedios, counsel for the plaintiffs, submits that this sentence was irrelevant and not pleaded, and the plaintiffs have not had an opportunity to explore evidence arising from this statement.  It was Shum’s personal opinion. It also contradicts the joint expert opinion which he refers to in his submission.

14. I agree with Mr Remedios’ submission.  The court need not rule on the truth of the contents of that assertion.  The contents of this part of the witness statement are irrelevant.

15. On the other hand, paragraph 46 needs to be looked at in the proper context. Shum was explaining why he did not see fit to disclose the litigation on the China Patent and the judgment dated 27 November 2001 to Chow.  Whether that belief was rightly or reasonably held may be relevant to the issue of whether Shum was dishonest in concealing material facts from the plaintiffs and the defence to the fraud claim.  I am not satisfied that paragraph 46 was so plainly and obviously irrelevant or frivolous or vexatious that it should be struck out without hearing the evidence of Shum.

16. I therefore dismissed the application.

17. I will deal with costs all in one go at the end of the trial.

HCA 537/2013

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 537 OF 2013

____________

____________

_____________

D E C I S I O N

_____________

The application

1. Shortly after each of the two third parties (Grace and Shum, respectively) has filed a witness statement, the defendants withdrew the third party proceedings against them.

2. The plaintiffs now seek discovery of “documents, agreements, correspondence or communications” which led to Grace and Shum agreeing to become defence witnesses and/or discontinuance of the third party proceedings against them.

Procedural history

3. The third party notice dated 12 February 2014 (subsequently amended) was served on Grace in about 2014.  She made a witness statement for the defendants in December 2014.  Proceedings were discontinued against her a month later.

4. In respect of Shum, attempts have been made to effect service out of jurisdiction on him.  It was not until March 2016 that he was served with the third party notice.  By the time of the pre-trial review on 13 June 2016, his witness statement was still in draft form.  The third party proceedings against him were discontinued on 28 June 2016 and his witness statement was served on the plaintiffs on 5 July 2016.

5. By a letter dated 15 September 2016, the defendants’ solicitors informed the plaintiffs’ solicitors that the terms of discontinuance of the third party proceedings were that:

(i)   Grace and Shum would be compensated for their legal costs incurred therein in return for their undertaking to cooperate as witnesses for the defendants. 

(ii)  In giving their evidence, the only payments they are entitled to are reimbursement of travel and in the case of Shum, accommodation costs when attending trial.

6. At the hearing, Mr Carolan, counsel for the defendants, also confirmed that the written agreements between the defendants and Grace/Shum have set out all the terms of the agreement(s) to cooperate as witnesses.

7. The plaintiffs are still concerned to know what, if any, were the consequences of Grace and Shum not cooperating or not attending trial.

8. The defendants refused to provide the discovery.  They claimed that the discovery was covered by litigation privilege and is confidential.  Disclosure was also not necessary.  The defendants are only willing to disclose the agreements for the sight of the court but not of the plaintiffs.  Mr Carolan described this application as a fishing expedition.

Legal principles

9. Discovery solely for the purpose of impeaching the credit of witnesses is generally not permitted as it does not relate to a matter in question: Hong Kong Civil Procedure 2016, Vol 1, §24/8/2.

10. However, payment of a not insubstantial sum to a non-expert witness is a matter that the trial judge should be aware of before he was to make findings on the credibility of the witnesses.  This may or may not affect his assessment but clearly it was a relevant factor to be considered by him.  A solicitor who is faced with a request by a non-expert witness to be reimbursed for the loss of income for attendance in court must inform him that the reimbursement is subject to the approval of the court and must disclose this fact to the court before the witness gives evidence.  Kwan Yim Kwan Peggy v Namkung Promotions (Worldwide) Ltd [2007] 3 HKC 314, Cheung JA, at §§10 and 12.

11. Mr Remedios, counsel for the plaintiffs, relies on a case of the US District Court of New York for the proposition that where the discontinuance of any action is used as a means of securing witnesses’ testimony, the matter should be brought to the attention of the court: State v Solvent Chemical Company, Inc 166 FRD 284, pages 5-7.  The rationale behind appears to be directed at maintaining the integrity of the adversarial process.

12. The New York authority is not binding on this court, especially since this court has not been informed about its system of discovery.

Application of the legal principles

13. The present discovery fell within the principle of discovery for the purpose of impeaching credit.  However, Peggy Kwan has laid down an exception to this principle.

14. I am of the view that the test for discovery is not whether a witness has been paid any money or whether the amount was substantial.  The pertinent question to ask is whether any benefit was promised or given to him to secure his cooperation as a witness or whether any sanction would be imposed if he breaches his promise to give evidence.  The rationale is to maintain the integrity of the litigation process, so as to ensure that witnesses do give evidence truthfully and voluntarily without fear of retaliation by the party who called him.

15. In the present case, the cause of action is based on fraudulent misrepresentation by the defendants, of which Shum was the main protagonist on their side.  He was the President, CEO and director of D1 until 2005 and was removed as a director in January 2006.  He was also the chairman and director of D2 until December 2005.  Grace was his assistant and employee of D2 until her employment was terminated in 2006.  If the matters alleged against him were established, the defendants may be liable.

16. The defendants had no knowledge as to whether or not the fraudulent misrepresentation was made and in any event had not authorized the same.  The matters happened over 10 years ago.  It would be fair to say that without the evidence of Grace and Shum, the defendants (with it new management since Shum left) may have an uphill fight.  Grace and Shum were not nominal third parties. Damages may be recovered against them.  They had a stake in seeing that the defendants would not lose in this case.

17. Discontinuance of proceedings in exchange for cooperation as witnesses is in itself a benefit in kind to the witnesses, in terms of their being spared from potential civil liability for contribution and indemnity, and costs of litigation.

18. There was payment of money in the form of reimbursement of legal costs incurred and accommodation or travel expenses in this case, the amount of which is unknown.  What conditions or undertakings were imposed by the defendants on the witnesses are also unknown.  All of these may affect the integrity of the litigation process.  All of these are, in turn, relevant to the assessment of the credibility of Grace and Shum by the trial judge.

19. There is no litigation privilege as the agreements between the defendants and the witnesses would not be communication for the purpose of seeking legal advice or communication made in contemplation of litigation.  In any case, the privilege would have been lost since the defendants have referred to the contents of the agreements.

20. I am of the view that the defendants should make discovery as sought.

21. In terms of scope of discovery, the use of the word “documents” in the plaintiffs’ request is too vague and would have been covered by other classes of documents in the same request.  That word can be removed.  As for “communications”, I specify that to be “communications that are recorded in audio record or written form”.

22. I reserve the question of costs till the end of the trial.

HCA 537/2013

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

HIGH COURT ACTION NO 537 OF 2013

_________________________

_____________

D E C I S I O N
_____________

THE APPLICATIONS

1. There are four summonses for determination:

a. The plaintiffs’ summons dated 5 December 2014 under O.38, r.4 on the scope of expert evidence as set out in Schedule A attached thereto;

b. The plaintiffs’ summons dated 2 February 2015 for leave to amend the above summons by amending the scope set out in Schedule A by varying the paragraph number 2.d. to 2A and by adding a new paragraph 6A therein;

c. The plaintiffs’ summons dated 10 February 2015 for leave to adduce the 3^rd affidavit of Souza Richard Alvaro filed on 10 February 2015; and

d. The defendants’ summons dated 5 December 2014 for leave to adduce expert evidence under O.38, r.36 as per Schedule 1 attached thereto.

2. The parties are legally represented.[1]

3. The defendants have no dispute over the plaintiffs’ summonses.[2]  The only dispute between the parties is the defendants’ summons.[3]

THE FACTURAL BACKGROUND

4. In a previous interlocutory application, the 2^nd defendant had appeared before G. Lam J. and applied to strike out the plaintiffs’ claim.  The learned judge delivered a written Decision on 18 September 2013, the same day of the hearing. I shall gratefully adopt the learned judge’s brief outline of the facts of this matter where he said:

“2. In very broad terms, the plaintiffs’ complaint is that as a result of certain representations by the common staff or agents of the defendants, which were made fraudulently, each of the plaintiffs was induced into purchasing certain shares of the 1st defendant on several occasions between December 2002 and October 2004 and had suffered financial loss as a consequence because the shares were worth less than what the plaintiffs paid for them.”

5. The most important representations for present purposes are that Nanning Maple Leaf Pharmaceutical Company Limited (“Nanning”), the 1^st defendant’s subsidiary company incorporated in Mainland China owned the China patent, that Nanning was in a position to manufacture and supply from its factory Tetrodin in Mainland China and that the 1^st defendant owned and was therefore in a position to grant exclusive distributor rights for Tetrodin for the treatment of symptom relief associated with withdrawal from opiate addiction in other countries especially Peru.[4]

6. The representations made to the plaintiffs are said to have been false in that:

(1) in the year 2000, the Beijing Municipal No. 2 Intermediate People’s Court had held that Nanning was not the qualified applicant for the China patent;

(2) in the same year 2000, Nanning appealed to the Beijing Municipal Higher People’s Court against the first instance decision.  On 27 November 2001 the appellate court affirmed the first instance decision, holding that Nanning was not the qualified applicant for the China patent, and that instead the People’s Liberation Army Institute of Pharmaceutical Chemistry (“the PLA Institute”) and one Qiu Fanglong (“Qiu”) jointly had the right to apply for the China patent;

(3) as from the date of the first instance decision, Nanning was not in a position lawfully to manufacture or sell Tetrodin from its factory without the licence of the PLA Institute and Qiu;

(4) from 27 November 2001 at the latest, Nanning had in fact ceased manufacturing Tetrodin at its factory;

(5) pursuant to the decision of the Beijing Municipal Higher People’s Court, on 31 October 2002, the State Intellectual Property Office (“SIPO”) changed the name of the registered owner of the China patent from Nanning to the PLA Institute and Qiu; and

(6) there was no appeal lodged with either the China Patent Office or SIPO concerning the ownership of the China patent.  Neither authority entertains legal proceedings or appeals concerning the ownership of a Chinese patent.[5]

DISCUSSION

The legal principles

7. Both parties rely upon the legal principles set out in my previous Decision in Ready Set Goal Ltd v BDZ Holdings Ltd (unreported, HCA223/2013, 18 November 2014).  For the purpose of concentrating on the application of those legal principles, I shall not set out those legal principles here.  I shall, nevertheless make reference to the individual cases in the application of the relevant legal principles to the factual situations of this matter below.

8. As a footnote to the legal principles as set out in  Ready Set Goal Ltd, it will be helpful to set out some general guidelines relevant to this matter below:

a. “It must be reiterated that expert evidence is only called for in specific areas where without such assistance the court is not in a position to properly consider the evidence.  To allow opinion evidence (even if it is an opinion from an expert) to be admitted in any other cases is a misuse of expert evidence. [39] Grand Wayfair Investment Company Ltd v Chan Yung Kan & Others (unreported, CACV238/2013, Lam VP, 26 September 2014)  See Barings plc (in liquidation) and another v Coopers & Lybrand (a firm) and others Barings Futures (Singapore) Pte Lye (in liquidation) v Mattar and others [2001] All ER (D) 110 by Evans-Lombe J.: ‘However, evidence meeting that test could still be excluded if the court took the view that calling it would not be helpful to the court in resolving any issue in the case justly.  Such evidence would not be helpful where the issue to be decided was one of law or was otherwise one on which the court was able to come to a fully informed decision without hearing such evidence.’”

b. “The Civil Justice Reforms emphasize the need to identify issues at an early stage and the making of prompt decisions as to which issues need full investigation and trial (Order 1A r.4).”  See Liu Kwong Wah v Kwan Po Ping & Others (unreported, HCMP1365/2010, Yuen JA in chambers, 16 August 2010).

c. In Chok Yick Interior Design & Engineering Co. Ltd. v Lau Chi Lun t/a Chi Hung Construction Eng. Co. (unreported, HCA1480/2008, Lam J. (as he then was) 5 May 2010) had set out extensively the importance of dealing with expert evidence in a proper manner and he said: “13. Under the CJR regime, parties and their legal representatives must address the question of expert evidence after the close of pleadings when they prepare their Timetabling Questionnaire in accordance with Practice Direction 5.2…”

d. In Kam Hing Trading (HK) Ltd v The People’s Insurance Company of China (HK) Ltd & Anor HCA1062/2008 [2009] 4 HKC 531, the then Madam Registrar Au-Yeung set out the directions on expert evidence:

a) the legal principles on relevance and admissibility of expert evidence as stated in Wong Hoi Fung v American International Assurance Co. (Bermuda) Ltd [2002] 4 HKC 225 apply;

b) expert directions should be sought as early as possible, usually after the pleadings had closed at the stage of Case Management Summons;

c) the applications should comply with paragraph 20 of PD 5.2, with issues identified and preferably to be answered by yes or no [8];

d) single joint expert should be considered [9]; and

e) no affidavit should be necessary unless ordered by the Court [10].

The proposed expert evidence

9. We shall now examine the defendants’ proposed expert evidence as set out in Schedule 1 of their summons, which the plaintiffs oppose.

10. Paragraph 8(a):

“As SIPO rejected PLA’s application on 24 May 2002 as the change had not been consented to by Qiu, how was it able, on 31 October 2002 to grant the change when Qiu’s consent had still not been given?”

Paragraph 8(b):

“In particular, on what authority was SIPO apparently able to approve the same application, (dated 12 March 2002) by the stated ‘opinion’, ‘Passed the examination’ when its earlier ruling had stated the “opinion”, ‘Should be deemed to have not been filed’?”

11. These two paragraphs can be dealt with together.  The defendants submit that they are the extension of the plaintiffs’ proposed paragraph 8, to which they have no objection.  They further submit that whether they are useful/helpful depends on what the expert say but their ability to consider the questions cannot be shut out by the plaintiffs’ objection.  The plaintiffs argue that they are irrelevant to the issues of these proceedings.

12. Without going into the details of the applications, one can readily see the difficulty of the questions posed for the expert.  The questions seem to turn on the facts why SIPO changed its stance and decision from one being rejection of the application to the other of approval of the same application.  These questions have to be answered by PLA or SIPO.  The expert is clearly not in a position to give opinion on the fact leading to the change of stance of SIPO.  The expert’s evidence will not be helpful to the court; as such, they are not issues for expert evidence and should be disallowed.  Guangzhou Green – Enhan Bio-Engineering Co Ltd & Another v Green Power Health Products International Co Ltd & Others [2004] 3 HKLRD 223 by Lam J. (as he then was) at 226G-H.  The Grand Wayfair Investment Ltd and Barings plc (in liquidation) should apply. 

13. It would be helpful to remind the defendants that the issue of expert evidence should be addressed at an early stage of the proceeding, latest at the Case Management Summons stage where they have to fill in the Timetabling Questionnaire to inform the court their positions.  See Chok Yick Interior Design & Engineering Co. Ltd. case.  The court is concerned with proper directions for expert evidence in order not to cause delay and waste of expenses.  Faith Bright Development Limited v Ng Kwok Kuen [2010] 5 HKLRD 425 at 430-431.  Where a party is uncertain about the use of the expert evidence before the expert prepares his expert report, the application for leave to adduce the expert evidence is tantamount to a fishing exercise for evidence, which is not permissible in the discovery of documents.  See Paragraph 9 of Mariner International Hotels Ltd. v Atlas Ltd. & Another (unreported, HCA10714/1998, 10752/1998 & 10821/1998 Burrell J. 18 January 2002)  This fishing exercise by way of expert evidence will waste more cost and time than the exercise of discovery because the cost for experts will be high.  The court’s time will be wasted if the expert evidence is found to be not useful.  The application for leave to adduce expert evidence must be on the basis that the applicant is certain that such evidence is necessary for the expeditious, fair and economical disposal of the matter.  This is the threshold for the application, failing which, the application will be dismissed as the applicant is unable to comply with Practice Direction 5.2 paragraph 20.

14. Paragraph 9 reads:

“Under PRC law did the owner of the China Patent have the right and/or liability to restrain manufacture or sale of TTX for the use by the third parties outside the PRC?”

15. The defendants argue: “If the ‘new owner’ of the China Patent could not restrain manufacture/use of TTX outside the PRC then Shum may have considered that the Distribution Agreement remained capable of performance based on other patents for TTX still held by D1.  The relevant pleading is D1’s Defence, para 36(c).”[6]

16. Paragraph 36 (c) of the Amended Defence pleaded that the 1^st defendant had relied upon PRC counsel’s advice that “the matter only concerned China and no other jurisdiction and was specifically restricted to drug dependence treatment and that no other patents regarding other uses of TTX were thereby affected.”  This was the reason in support of the 1^st defendant’s argument that the Public Statements were neither “false” nor “untrue”.  Whether the 1^st defendant had the PRC counsel’s opinion and had relied upon it is a matter of fact, which the 1^st defendant had to adduce as factual evidence at the trial.  This is the live issue the court is concerned with.  The burden of establishing relevance is on the applicant.  See §7 of Majorette Hong Kong Ltd v Fullmore Corporation Ltd (unreported, HCA1583/2008, Registrar Lung, 23 June 2010).  This morning counsel for the defendants submits that the advice as exhibited in page 61 and page 71 respectively in bundle B1 should not be treated as expert opinion.  They are produced to prove the fact of reliance by the defendants on the advice.  Now the defendants ask for leave to call expert evidence on the law, not the fact that whether or not such legal advice, which had been given was correct under the PRC law.  This legal question is not the live issue.  Whether it is reasonable for the 1^st defendant to rely upon the counsel advice is not an issue pleaded in the pleadings.

17. Since this question is not the live issue, it should be disallowed, in accordance with Majorette case.

18. Paragraph 10 reads:

“Under PRC law were the steps taken or applications made by Nanning to challenge the Final judgment and/or the decision of SIPO to change the name of the registered owner as described in paragraphs (b)(iii), (iv) (v) and (vi) of the particulars to paragraph 36 of the 1^st defendant’s Defence lawful and/or valid?”

Paragraph 11 reads:

“Under PRC law were the decisions of SIPO and/or the Higher People’s Court of Beijing, (the ‘Court’) in respect of the above mentioned steps/applications substantive decisions made on the merits or arrived at without any such consideration on the basis only that Nanning had no right or standing to bring such matters before the respective administrative/legal authorities?”

Paragraph 12 reads:

“If the answer to question 10 above is in the affirmative does it follow, under PRC law that it was not until 15 March 2005, (when the Court rejected the request for review) that all available administrative/legal proceedings to challenge the decision of SIPO had been finally determined?”

19. Paragraphs 10 to 12 are dealt with together as proposed by the defendants in their written submissions.  The defendants submit “These focus precisely on the particulars pleaded under para 36 (b) (iii)-(vii) of D1’s Defence which, inter alia are relied on, (in para 37 of Defence) in denying the alleged fraud and/or knowledge as pleaded in para 47 ASOC.  Subject to the experts’ opinions such evidence may help to determine whether or not Shum had been deceitful.  Specifically, Ds would be able to contend that the nature and existence of such proceedings were inconsistent with the inference of deceit which Ps’ proposed questions appear designed to support.[7]”

20. These three proposed questions for the expert bear the same defects as paragraph 9 above.

21. First of all, those proposed questions were, as pleaded by the 1^st defendant in its Amended Defence at §36, in fact the advice given by the PRC lawyers to the 1^st defendant, who relied upon such legal advice to say that the Public Statements were neither false nor untrue.  Whether the advice was correct is not the live issue.  The live issue is whether the 1^st defendant had genuinely relied upon the legal advice to form the belief that the Public Statements were true.  As the 1^st defendant has pleaded that it had relied upon the legal advice, the legal advice must be in existence.  It is unnecessary to obtain any expert evidence to prove its existence.  Nor is it necessary to prove that the legal advice is correct as this issue was not pleaded in the pleadings.  In the Reply, the plaintiffs accused the 1^st defendant of non-disclosure of the information only.[8]

22. Secondly, the purpose of adducing such expert evidence is not certain as the written submission states that “subject to the experts’ opinions, such evidence may help to determine whether or not Shum has been deceitful.”  The exercise is tantamount to a fishing exercise for evidence.  This issue has been analyzed above.

23. Based upon the authorities cited above, paragraphs 10 to 12 must be dismissed.

COSTS AND ORDER

24. The defendants fail in their application.  The costs should follow the event.  The plaintiffs should have their costs, which are to be summarily assessed under O.62, r.9A RHC.  The plaintiffs have submitted their schedule of costs for assessment.  The total amount of costs for this 2-hour hearing is, as commented by the defendants, as judged from the issues above, is on the high side.  The following matters are taken into account: the plaintiffs had not obtained leave from the Court to file and serve the affidavits in support of this application in accordance with Kam Hing Trading.  The costs for those affidavits will be disallowed.  Secondly, the issues in dispute over the applications are by no means complicated.  The main thrust is the bases upon which the defendants rely in support of their defence.  The proposed expert evidence is not on the issues of dispute.  They are digressions from the main issues.  Time required for conference with clients on those issues should not require more than 10 hours.  Taking into account all the relevant factors and circumstances including the defendants’ costs, by adopting a broad-brush approach, the appropriate costs for this application, including the reserved costs and the hearing today, with counsel’s certificate should be $250,000.00.

25. The Court now makes an order in terms as follows:

a. The plaintiffs’ summonses under paragraph 1(a), (b) & (c)  are allowed, except that the time for the parties to exchange the expert reports be 42 days from the date hereof;

b. The defendants’ summons for expert evidence under paragraph 1(d) be dismissed;

c. The costs of the defendants’ summons be to the plaintiffs as per paragraph 24 supra.

d. The costs of the plaintiffs’ summons dated 5 December 2014 be in the cause.

HCA 537/2013

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 537 OF 2013

____________

____________

_______________

J U D G M E N T

_______________

Introduction

1. This is an application by the 2^nd defendant for an order to strike out the statement of claim and dismiss the action, alternatively for an order for the trial of a preliminary issue, namely, whether the plaintiffs’ claims against it are time-barred under the Limitation Ordinance (Cap 347).

Outline of plaintiffs’ claim

2. In very broad terms, the plaintiffs’ complaint is that as a result of certain representations by the common staff or agents of the defendants, which were made fraudulently, each of the plaintiffs was induced into purchasing certain shares of the 1^st defendant on several occasions between December 2002 and October 2004 and had suffered financial loss as a consequence because the shares were worth less than what the plaintiffs paid for them.

3. The 1^st defendant, which I shall call WEX, is a listed company incorporated in Canada engaged in the pharmaceutical industry.  It has a number of wholly owned subsidiaries, including (i) the 2^nd defendant, which is a company incorporated in Hong Kong and which I shall call WEX HK, (ii) GlobalMed Corporation (‘”GlobalMed”) and (iii) Acro Pharm Corporation (“Acro Pharm”). 

4. Until November 2007, WEX also had a 97% interest in Nanning Maple Leaf Pharmaceutical Company Limited (“Nanning”), a company incorporated in Mainland China.  Between November 2007 and 7 May 2010, Nanning was wholly owned by WEX.

5. Three individuals, namely, Frank Shum (“Shum”), Grace Leong (“Leong”) and Donna Shum are said to have been senior staff of both WEX and WEX HK (with Shum being the President and CEO of WEX) and to have been their agents in their dealings with the plaintiffs.  It is said that WEX HK also acted as the agent of WEX.

6. The 1^st plaintiff (“Chow”) is an individual who is a director of and owned half of the issued share capital of each of the 2^nd and 3^rd plaintiffs, both companies incorporated in Hong Kong.

7. WEX and its subsidiaries were at the material times engaged in the development and commercialisation of Tetrodin and Tetrodonin, both of which contained Tetrodotoxin, for the treatment of symptom relief associated with withdrawal from opiate addiction.  The use of Tetrodotoxin for abstaining from all opiate addiction was protected by a patent registered in Mainland China (no. ZL95190556.2) (“the China patent”).

8. The plaintiffs plead in their statement of claim that, beginning from about July 2001, Shum and Leong met with Chow and another investor Timothy Ma (“Ma”) on numerous occasions to discuss the possibility of WEX granting exclusive distribution rights for Tetrodin in Peru to a company to be nominated by Chow and Ma, and to promote WEX’s shares as an investment. Shum stated that WEX needed funds to continue its clinical studies for the Canadian patent registration and to expand the manufacturing facility of Nanning.

9. The plaintiffs aver that between July and November 2001, Shum and Leong made a number of representations to Chow and Ma. The most important representations for present purposes are that Nanning owned the China patent, that Nanning was in a position to manufacture and supply from its factory Tetrodin in Mainland China, and that WEX owned and was therefore in a position to grant exclusive distributor rights for Tetrodin in other countries especially Peru.

10. At the same time, to give credence to the representations, the plaintiffs say, Shum and Leong gave Chow and Ma a number of documents, including a copy of the China patent, WEX’s leaflets about Tetrodin, a brochure about Nanning’s factory and Tetrodin, and a letter from WEX HK to Chow dated 6 October 2001 stating:

“… we have done very well, and will do even better over the next 12 to 18 months specially if we can open up the Peru market with you. … We would be most grateful if you could help us to bring in some new funds”.

11. Acting in reliance on those representations, Chow and Ma on behalf of their nominated company, Winland Enterprises Group Inc (“Winland”), entered into, inter alia, a written distribution agreement for Tetrodin in Peru with an entity called GlobalMed Corp dated 12 November 2001.  This distribution agreement in turn contained further representations, including a statement in the recitals that:

“GlobalMed exclusively distributes, sells, and markets the drug Tetrodin^TM which is protected by patent and related intellectual property and know-how which is owned and manufactured by [WEX, Nanning, and WEX HK] … GlobalMed has the exclusive distributorships for every country except People’s Republic of China, Hong Kong and the Dominion of Canada”.

12. Acting in reliance on these oral and written representations, the plaintiffs, together with three other companies controlled or represented by Chow and Ma, began to subscribe for WEX’s shares in November 2001.

13. On 5 December 2001, the distribution agreement for Tetrodin in Peru was replaced by another distribution agreement between Winland and GlobalMed Corp.  This agreement contained the same representations complained of as in the agreement dated 12 November 2001.

14. The distribution agreement of 5 December 2001 was in turn replaced by a distribution agreement between Winland and a different subsidiary of WEX, namely, Acro Pharm in May 2003.  Chow says that she and Ma had relied on the representations made in 2001 as well as the statements contained in three letters provided by the defendants to Chow in 2003, in agreeing for Winland to enter into the new distribution agreement with Acro Pharm dated 21 May 2003. 

15. One of the three letters was dated 21 May 2003 and signed by Donna Shum on behalf of Acro Pharm and stated that Shum

“has been given the right … to enter into a contract regarding Peru, to manufacture and supply Tetrodin^TM and/or Tetrodonin^TM”.

16. The agreement with Acro Pharm dated 21 May 2003 contained further representations including a recital that:

“Acro Pharm exclusively distributes, sells and markets the drug Tetrodin^TM and Tetrodonin^TM which is protected by patent and related intellectual property and know-how which is owned and manufactured by [WEX, Nanning and WEX HK] … Acro Pharm has exclusive distributorships for every country except People’s Republic of China, Hong Kong and the Dominion of Canada”.

17. The plaintiffs plead that, in reliance on the representations made in 2001, the statements in the three letters given to them in 2003 and the representations in the agreement with Acro Pharm dated 21 May 2003, they (together with the three other companies represented by Chow and Ma) continued to purchase WEX’s shares until 29 October 2004.

18. The representations made to the plaintiffs are said to have been false in that:

(1) in the year 2000, the Beijing Municipal No. 2 Intermediate People’s Court had held that Nanning was not the qualified applicant for the China patent;

(2) in the same year 2000, Nanning appealed to the Beijing Municipal Higher People’s Court against the first instance decision. On 27 November 2001 the appellate court affirmed the first instance decision, holding that Nanning was not the qualified applicant for the China patent, and that instead the People’s Liberation Army Institute of Pharmaceutical Chemistry (“the PLA Institute”) and one Qiu Fanglong (“Qiu”) jointly had the right to apply for the China patent;

(3) as from the date of the first instance decision, Nanning was not in a position lawfully to manufacture or sell Tetrodin from its factory without the licence of the PLA Institute and Qiu;

(4) from 27 November 2001 at the latest, Nanning had in fact ceased manufacturing Tetrodin at its factory;

(5) none of WEX, WEX HK, Nanning, GlobalMed and Acro Pharm was in a position to grant the exclusive distributorship for Tetrodin manufactured by Nanning;

(6) pursuant to the decision of the Beijing Municipal Higher People’s Court, on 31 October 2002, the State Intellectual Property Office (“SIPO”) changed the name of the registered owner of the China patent from Nanning to the PLA Institute and Qiu; and

(7) there was no appeal lodged with either the China Patent Office or SIPO concerning the ownership of the China patent.  Neither authority entertains legal proceedings or appeals concerning the ownership of a Chinese patent.

19. It is said that the representations were fraudulently made by WEX and WEX HK knowing them to be false or being reckless whether they were true or false.  The particulars of knowledge given include the plea that Shum, being the legal person’s representative of Nanning, attended the hearings before both the first instance and appellate courts in Beijing.

20. The plaintiffs plead that they have suffered losses and accordingly claim damages from the defendants.

Public announcement

21. A further twist in the events is that on 29 June 2005, in a news bulletin published by WEX pursuant to its duty of disclosure as a listed company in Canada, it was announced that:

“WEX Pharmaceuticals Inc. (“WEX” or the “Company”) (TSX:WXI) announced that it has been notified that based on a court ruling (the “Ruling”) the Chinese Patent Office (“CPO”) has changed registered ownership of the drug withdrawal Patent No. ZL95190556.2 “Use of Amino Quinazoline Hydride Compound and its Derivative for Abstaining from Drug Dependence” in China from the Company’s subsidiary, Nanning Maple Leaf Pharmaceuticals (“NMLP”) to one of the two inventors and a third party who alleges to have been an employer of the other Inventor.

… WEX filed an appeal of the Ruling earlier this year and the Court subsequently dismissed the appeal. The Company disagrees with the Ruling and considers that the prior assignment of interest to NMLP in the invention was valid and therefore that WEX has at least part-ownership rights to the patent. Even though the Company is currently investigating other legal and business options, until the ownership of the patent is resolved and as a result of financial and other considerations, the Company has decided to temporarily postpone development and testing of its opiate addiction withdrawal drug in China.

‘l attach great significance to patents and the protection of industrial secrets for our technologies, products and processes and I am disappointed with the current Ruling’, said Frank Shum, President and CEO.  ‘We will continue to strengthen our patent portfolio around our products by adding to the 82 existing patent or patent applications we have filed in commercially significant areas. As a result of progress in research activities, the Company is planning to file several new patent applications before the end of the year’.”

22. Further, in its annual report for the year ended 31 March 2005, presumably published in the second half of 2005, WEX stated that:

“The Company was notified in April 2005 that its appeal with the Chinese Patent Office concerning ownership of a patent relating to addiction withdrawal in the territory of China was not successful. The Company is currently considering legal options and other possible business arrangements.”

The annual reports for the years ended 31 March 2006 and 31 March 2007 contain similar statements.

23. On the plaintiffs’ case, these announcements were also untrue and fraudulently made by WEX because they gave the impression that the group lost the patent litigation and appeal in Mainland China in 2005 when in fact the first instance and appellate decisions of the Beijing courts were given in the years 2000 and 2001.  WEX and WEX HK must have known the results at the time and not only as late as in 2005.

24. The statements in the news bulletin and annual reports were published after the share purchases made by the plaintiffs and are therefore irrelevant to their underlying cause of action.  They are, however, central to the rival arguments on whether the plaintiffs’ claims are time-barred. I shall return to them later.

Procedural history

25. On 21 June 2011, the three parties who are the plaintiffs in the present action caused a writ to be issued in High Court Action No 1035 of 2011 against WEX.  I shall refer to this as HCA 1035/2011, which was a claim for breach of the agreement entered into between the plaintiffs and WEX in around July to December 2001 in that WEX failed to inform the plaintiffs that Nanning had lost its claim for ownership of the China patent and ceased production of Tetrodotoxin, which had caused the plaintiffs to purchase WEX’s shares to their detriment.

26. On 22 June 2012, the plaintiffs obtained ex parte an order extending the validity of the writ in HCA 1035/2011.  On 17 September 2012, the plaintiffs amended the writ and statement of claim by adding WEX HK as a defendant and by pleading fraudulent misrepresentation.  The amended statement of claim in HCA 1035/2011 is similar to the statement of claim in the present action.

27. The plaintiffs then obtained leave ex parte to serve the amended writ on WEX out of the jurisdiction.

28. In due course WEX and WEX HK applied to the court in HCA 1035/2011 for orders to set aside the extension of the validity of the writ, to set aside leave for service out of the jurisdiction and service of the writ, and to disallow the amendments to the writ and statement of claim.

29. In his judgment dated 7 March 2013, Chung J discharged the order for extension of the validity of the writ and the order giving leave to serve out of the jurisdiction and set aside service of the writ on the defendants.  He also made certain comments on the plaintiffs’ amendments which the defendants have at one stage relied on in this action as having decided that the misrepresentation claim is time-barred.

30. HCA 1035/2011 having in effect come to an end, on 3 April 2013, the plaintiffs issued the writ in the present action indorsed with a full statement of claim.

31. Nevertheless, the plaintiffs sought to appeal out of time against Chung J’s decision in HCA 1035/2011.  In the result, the Court of Appeal refused to grant an extension of time for appeal and leave to appeal (HCMP 1516/2013, 5 September 2013), but made it clear that Chung J made no determination that the plaintiffs’ claim for fraudulent misrepresentation was actually time-barred by September 2012 (as opposed to being arguably time-barred).  In particular, Fok JA, giving the judgment of the court, stated:

“13. On the question of whether the amendments to the writ and statement of claim in September 2012 should have been disallowed, the Judge rightly identified the case of Global Bridge Assets Ltd and Others v SHK Securities Ltd [2012] 4 HKLRD 474 as laying down the applicable test where a plaintiff seeks to resist disallowance of an amendment on the ground that the claim is said to be time-barred (so that the amendment acts to the prejudice of the defendant because of the doctrine of relation-back), namely whether it can be shown that the defendant has no reasonably arguable defence of limitation to the new claim.

14. Applying that test, the Judge was plainly not satisfied that the defendants could be shown to have no reasonably arguable defence of limitation to the new misrepresentation claim advanced by way of the amendments to the writ and statement of claim. As such, following the course adopted in Global Bridge Assets, it was appropriate to leave the plaintiffs to advance the new claim in a fresh action. This they have done in HCA 537/2013, the writ in which was issued on 3 April 2013. The question of whether the claim is not time-barred by reason of the operation of s. 26(1) of the Limitation Ordinance can be resolved in that action.

…

19.  … we do not consider that it is correct to read §§26 and 27 of the Judgment as ruling definitively that the plaintiffs’ misrepresentation claim (now advanced in HCA 537/2013) is time-barred, which is a contention the defendants are apparently maintaining in an application seeking to strike out the writ in the new action.  In our view, such a contention is taking the Judge’s comments in §§26 and 27 of the Judgment out of context and attributing consequences to them which were either not intended or not necessary for the Judge to express.  For our part, we think those paragraphs should be understood as explaining the reason why the Judge concluded that the new misrepresentation claim was arguably time-barred (which was all that he needed to decide in order to resolve the question of whether the amendments should be disallowed).”

Limitation defence

32. There is no dispute between the parties that the ordinary limitation period for the cause of action pleaded by the plaintiffs is six years, and that more than six years have elapsed between the plaintiffs’ last purchase of WEX’s shares (29 October 2004) and the date of the writ herein (3 April 2013).

33. The plaintiffs however rely upon the extension of the limitation period based on fraud and deliberate concealment by virtue of s 26 of the Limitation Ordinance (Cap 347), which provides as follows:

“(1) Subject to subsection (4) [which is not relevant here], where in the case of any action for which a period of limitation is prescribed by this Ordinance, either-

(a) the action is based upon the fraud of the defendant;

(b) any fact relevant to the plaintiff’s right of action has been deliberately concealed from him by the defendant; or

(c) the action is for relief from the consequences of a mistake,

the period of limitation shall not begin to run until the plaintiff has discovered the fraud, concealment or mistake (as the case may be) or could with reasonable diligence have discovered it.

(2) References in subsection (1) to the defendant include references to the defendant’s agent and to any person through whom the defendant claims and his agent.

(3) For the purposes of subsection (1), deliberate commission of a breach of duty in circumstances in which it is unlikely to be discovered for some time amounts to deliberate concealment of the facts involved in that breach of duty.”

34. It is clear that the action as pleaded is based upon the fraud of the defendants, fraud being an essential element of the cause of action.  Further, the plaintiffs contend that two facts had been concealed from them by the defendants, such facts being necessary facts for the cause of action of fraudulent misrepresentation, namely, that the representations were false at the time when they were made and that the representations were made by the defendants fraudulently, with knowledge that they were false.

35. The right of the plaintiffs to the extended limitation period under s 26 will therefore depend upon whether the plaintiffs can prove – there being no dispute that the burden of proof rests on them – that they did not discover, and could not with reasonable diligence have discovered, these two facts.

36. This is however not the trial and I am not concerned with whether or not the plaintiffs have discharged that burden of proof.  This is a strike out application by the defendants and in order to succeed on this application, the defendants have to show that it is plain and obvious now that the plaintiffs will never be able to surmount the time-bar – in other words, that there is no possibility the plaintiffs can avail themselves of the extended period under s 26.  In deciding whether the defendants’ contention should prevail on this application, the facts pleaded by the plaintiffs are generally to be assumed to be true (unless perhaps they can be shown to be incontestably false).

37. Mr Carolan, appearing for the defendants, accepts that he cannot for present purposes gainsay the plaintiffs’ statement on oath that they did not discover the relevant facts until late 2010 or 2011.  His contention is that it is plain that they could have discovered them earlier if they had acted with reasonable diligence.

38. In Peco Arts Inc v Hazlitt Gallery Ltd [1983] 1 WLR 1315; [1983] 3 All ER 193 at 199, Webster J said this on the meaning of reasonable diligence in this context:

“… I conclude, first of all, that it is impossible to devise a meaning or construction to be put on those words which can be generally applied in all contexts because, as it seems to me, the precise meaning to be given to them must vary with the particular context in which they are to be applied. In the context to which I have to apply them, in my judgment, I conclude that reasonable diligence means not the doing of everything possible, not necessarily the using of any means at the plaintiff’s disposal, not even necessarily the doing of anything at all, but that it means the doing of that which an ordinarily prudent buyer and possessor of a valuable work of art would do having regard to all the circumstances, including the circumstances of the purchase.”

39. Mr Carolan relies on what Millett LJ said in Paragon Finance plc v D B Thakerar & Co (a firm) [1999] 1 All ER 400 at 418, namely, that the plaintiffs “must establish they could not have discovered the fraud without exceptional measures which they could not reasonably have been expected to take”.  I do not think this conflicts with the approach of Webster J in Peco Arts Inc.  In fact in Paragon Finance plc Millett LJ went on to agree with the test suggested by May LJ in that case, namely, “how a person carrying on a business of the relevant kind would act if he had adequate but not unlimited staff and resources and were motivated by a reasonable but not excessive sense of urgency”.  The reference to sense of urgency must be understood in the context of that case where the plaintiffs sought to introduce a new claim by way of amendment many years after they had instituted the original action.  The plaintiffs had been alerted much earlier to the fraudulent nature of the mortgage applications but did not discover the solicitors were implicated in the fraud.  Moreover, I note that the Court of Appeal’s conclusion there was that the judge should have reached no concluded view on limitation summarily at the amendment stage, and should have “left all to play for in fresh proceedings” (p 418).

40. In support of his submission Mr Carolan relies principally on the news bulletin published by WEX on 29 June 2005 as well as WEX’s annual report for the year ended 31 March 2005 I have referred to earlier.  They show that the ownership of the China patent had been changed as a result of a court ruling in Beijing.  He argues that the plaintiffs could with reasonable diligence have noticed the contents of the news bulletin and annual report, and could have conducted enquiries with SIPO which would have revealed that the owner of the China patent had been changed from Nanning to the PLA Institute and Qiu on 31 October 2002.

41. Mr Remedios, who appears for the plaintiffs, rhetorically asks: what right do the defendants have to say to the plaintiffs: “You ought not to have trusted us.  You are bound to carry out enquiries to see we are not cheating you.”  I bear in mind however that the question of what the plaintiffs could with reasonable diligence have discovered is to be answered dispassionately: Peconic Industrial Development Ltd v Lau Kwok Fai (2009) 12 HKCFAR 139 at §29.

42. In my view the defendants’ contention has no merit.  It is important to note that, on the plaintiffs’ case, the news bulletin and the annual report were misleading in suggesting that the court ruling that changed the patent ownership was only given in 2005 and that WEX only received notice of such ruling in 2005.  On the footing that the rights to the China patent were only lost in 2005 (or were only known in 2005 to have been lost), it would hardly appear to the plaintiffs that the defendants’ representations were false at the time when they were made in 2001 and 2003 respectively, still less that they were known by the defendants to be false when they were made.  The relevant statements in the news bulletin and the annual report tend therefore to exonerate the defendants by implying that their representations were accurate prior to 2005 and that they had no knowledge prior to 2005 that the representations were false or had become false.  On that basis, it seems to me that the effect of those statements is to conceal, rather than to reveal, the two facts that are crucial to the plaintiffs’ claims for fraud.

43. The defendants can point to nothing in the news bulletin and the annual reports or the surrounding circumstances that would suggest to any reader, including the plaintiffs, that the relevant statements in those public documents might be untrue, and that in fact the Beijing courts pronounced as early as in 2000 and 2001 that none of WEX, WEX HK and Nanning had any right in the China patent.  On the contrary, the news bulletin and the annual reports are public announcements made by a regulated listed company which were meant to convey information accurately to shareholders and the public at large.

44. In these circumstances there is force in Mr Remedios’ submission, relying on cases such as Betjemann v Betjemann [1895] 2 Ch 474 at 480 and Peco Arts Inc v Hazlitt Gallery Ltd [1983] 3 All ER 193 that until there was cause for suspicion, something that put them on inquiry, the plaintiffs were entitled to believe the public announcements to be accurate, without seeking to locate and turn up each and every relevant document so as to verify the facts asserted.

45. Mr Carolan relies on the evidence given by Chow herself that soon after discovering the news bulletin in about May 2010, she and Ma embarked on steps which eventually led the plaintiffs to obtain a copy of the China patent and the Beijing court judgments.  He argues that given that the news bulletin was published in June 2005, had the plaintiffs cared to read it, they would similarly have been led to the discovery of the facts in question.

46. However, the reason why Chow discovered the news bulletin in May 2010 was that in April 2010, she received an unexpected telephone call from an officer of WEX requesting the cancellation of the distribution agreement with Acro Pharm dated 21 May 2003, which agreement had been put in abeyance at Shum’s request since January 2005.  She received an email from the same person on 24 April 2010 suggesting that the parties enter into a simple termination agreement to cancel the distribution agreement.  She and Ma then became concerned about their distribution rights for Tetrodin in Peru.  This caused them to make enquiries, which resulted in their discovery of the news bulletin and, in turn, the other documents.

47. Absent such an event that caused concern and prompted enquiries, it is not plain and obvious to me that an ordinarily prudent investor in WEX would necessarily have taken steps to investigate the position with respect to the China patent.

48. On the evidence, even after locating the news bulletin, the plaintiffs did not in fact suspect that the public statements might be false until December 2010 when Ma found on the internet a partially translated copy of the judgment of the Beijing Municipal Higher People’s Court.  Thereafter they made enquiries as a result of which they obtained further information and documents.

49. Thus, on 16 February 2011, Chow obtained a sealed copy of the China patent which showed that SIPO had changed the registered owner of the patent from Nanning to the PLA Institute and Qiu on 31 October 2002.

50. On 23 September 2011, Chow obtained a notarised full copy of the judgment of the Beijing Municipal Higher People’s Court dated 27 November 2001.

51. The public announcements by WEX in 2005 made no mention of the dates of the first instance and appellate judgments of the Beijing courts.  There is evidence from Mainland lawyers that without specific information such as the case numbers, parties and dates, it would have been impossible for the plaintiffs to locate a copy of the judgments.

52. The steps taken by the plaintiffs after their chance discovery of the Beijing appellate judgment have been set out in the affidavit evidence.  It is unnecessary to go into any further detail here since there is no challenge from the defendants, at least for the purposes of this application, that from December 2010 onwards the plaintiffs did use reasonable diligence to discover the facts.  The question is whether the plaintiffs should have done all those things much earlier, in 2005, soon after the news bulletin was published by WEX.  For the reasons I have already given, I do not think it is so plain and obvious that an ordinarily prudent investor would have done so, that there is no possibility the plaintiffs could prove at trial they are entitled to the extended limitation period under s 26.  Whether or not the plaintiffs could have with reasonable diligence discovered the facts in question is, in my view, a matter for trial.

Preliminary issue

53. As an alternative, the defendants contend that the question of limitation should be ordered to be tried as a preliminary issue.  It seems to me the application is at best premature.  WEX has not even been served and has not taken part in this application.  No defence has been filed by either defendant.  No one is therefore in a position to tell with any degree of certainty what other issues of fact or law there will be at trial and how many witnesses are likely to be involved.  Mr Carolan confirms that he has no instructions as to what his client’s defence might be.  In these circumstances there is no material on which I can properly assess the benefit of ordering a preliminary issue.

54. Furthermore, the general rule is that all the issues in a case are tried at one and the same time.  It is for the 2^nd defendant who makes this application to show that it is just and convenient to depart from that general rule: Telford Development Ltd v Shui On Construction Co Ltd [1990] 2 HKC 110.  In the present case, the limitation point is not a pure point of law based on undisputed facts, but an issue that turns very much on the facts and circumstances.  As Webster J said in Peco Arts Inc, at 199g, the meaning of the words “could with reasonable diligence have discovered it” depends very much on the context in which they have to be applied.  There will in this case need to be discovery, witness statements, possibly even expert evidence on Chinese law, and a trial involving oral evidence, for the purpose simply of determining such a preliminary issue.  There may also be appeals from the determination. 

55. I doubt whether this will after all translate into a saving in costs.  Moreover, if the plaintiffs eventually prevail on the preliminary limitation issue, they would still have suffered great delay in having their substantive claim determined and resolved by the court, which aggravates the injustice to them in a case where, ex hypothesi, the defendants had defrauded them and concealed their fraud. 

56. It should further be borne in mind that the representations in question were made in 2001 and 2003 and the share purchases made by the plaintiffs allegedly in reliance on such representations took place between 2002 and 2004.  It seems to me that the further delay that could potentially be caused by ordering a preliminary issue is highly undesirable in these circumstances.

Conclusion

57. The 2^nd defendant’s summons is therefore dismissed.